<PAGE>   1





                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                  FORM 10-K/A

[ X]     Annual report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934
                  For the fiscal year ended JUNE 30, 1996, or

[  ]     Transition report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934
         For the transition period from_____________ to _______________

                        Commission file number: 0-10640

                              COLLAGEN CORPORATION
             (Exact name of Registrant as specified in its charter)


                  DELAWARE                               94-2300486
               (State or other                        (I.R.S. Employer
               jurisdiction of                       Identification No.)
              incorporation or
                organization)

       2500 FABER PLACE, PALO ALTO, CA                      94303
  (Address of principal executive offices)               (Zip Code)


Registrant's telephone number, including area code: (415) 856-0200

Securities registered pursuant to Section 12(b) of the Act:  NONE

Securities registered pursuant to Section 12(g) of the Act:  COMMON STOCK, 
                                                             $.01 PAR VALUE
                                                            (Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 month ( or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES   X            NO
                                       -----             ----- 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.   [  ]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of the Common Stock on September 6,
1996, on the Nasdaq Stock Market, was approximately $128,272,131.  Shares of
Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates.  This determination of affiliate status is not
necessarily a conclusive determination for other purposes.



                                     Page 1
<PAGE>   2




As of September 6, 1996,  Registrant had 8,690,110 shares of Common Stock
outstanding.

Parts of the Proxy Statement for Registrant's 1996 Annual Meeting of
Stockholders are incorporated by reference to Parts III and IV of this Form
10-K Report.





                                     Page 2
<PAGE>   3




                                     PART I

ITEM 1.          BUSINESS

GENERAL

         Collagen Corporation (the "Company") designs, develops, manufactures
and markets on a worldwide basis high quality biocompatible products for the
treatment of defective, diseased, traumatized or aging human tissues with the
goal of superior physician and patient satisfaction for its products.  The
Company has grown by identifying medical applications for its technology,
developing innovative products and building markets with respected healthcare
professionals, either directly or with marketing and technology partners. The
Company's core products are principally used in reconstructive and cosmetic
applications, the treatment of stress urinary incontinence, and bone repair.
The Company focuses on development of new products based upon biomaterials,
especially collagen, for sale in human healthcare markets worldwide.


CORE TECHNOLOGY

         The foundation of the Company's current business is the collagen
protein family, around which the Company has developed proprietary technology
and patented materials, processes and uses. Collagen is a family of naturally
occurring proteins that serve as the basic structural building blocks of the
tissues found in skin, cartilage, bone, tendons, ligaments, arterial walls,
nerve sheaths and other organs and tissues of the body. Collagen is present in
all mammals in higher concentration than any other protein and is quite similar
among species. There are at least fifteen types of collagen, the most common of
which is the type primarily used in the Company's commercial products and
products under development.

         The Company has developed proprietary processes to purify its bovine
(cow)-source collagen on a commercial scale and to manufacture "tissue-like"
implants from the resulting materials. These proprietary processes alter the
immunological profile of the bovine-source collagen, thus minimizing the
potential for causing an allergic reaction. The result is a purified and
sterilized fibrous collagen material that can be easily injected or implanted
into the human body.

         The potential for causing an allergic reaction arising from the
injection of bovine-source collagen is relatively low. Based on the Company's
statistics, approximately 97% of men and women tested show no allergic reaction
to a skin test and can be treated with the bovine- source collagen injection.
The 3% that show an allergic reaction to the skin test display typical symptoms
of hypersensitivity, which include redness, itchiness and swelling. An
additional 1-2% of the people treated develop an allergic reaction after one or
more injections.

         In August 1995, the Company added triglycerides as its second core
technology when the Company entered into a stock purchase agreement with certain
of the stockholders of LipoMatrix, Incorporated ("LipoMatrix"), a developer and
manufacturer of the Trilucent(TM) breast implant ("Trilucent implant"), to
purchase approximately 50% of the outstanding securities of LipoMatrix on a
fully diluted basis.  The Company also entered into a stock purchase agreement
with certain of  LipoMatrix's management and employees to purchase the remaining
10% of the outstanding



                                     Page 3
<PAGE>   4




securities on a fully diluted basis.  This purchase increased the Company's
ownership interest in LipoMatrix from approximately 40% to 100% of the
outstanding securities on a fully diluted basis. The acquisition of LipoMatrix,
which was accounted for as a purchase, had an aggregate purchase price of
approximately $23.7 million. The Company completed the closing of the
aforementioned acquisition of LipoMatrix  in January 1996.

         LipoMatrix is developing a proprietary family of biocompatible
products. Trilucent implant, which is currently being sold in eight European
countries, achieves biocompatibility by utilizing soybean oil, which has a long
history of parenteral use in human beings as a filler.  Since the neutral
triglycerides of the soybean oil have the same radiodensity as human fat,
Trilucent implant provides a radiolucency profile superior to that seen with
saline and silicone filled implants, which may result in more meaningful
mammograms to facilitate detection of breast cancer.  Laminated into the
implant shell is an electronic transponder, which will allow non-invasive
implant identification.  During fiscal 1997, the Company expects to introduce
the Trilucent implant in additional countries and also begin an expanded United
States clinical trial.


STRATEGY

         The Company's strategy consists of the following principal elements:

                 Expand Existing Medical Franchise. The Company has a 15-year
                 involvement with the cosmetic procedure-oriented segments of
                 the plastic surgery and dermatology markets. Medical
                 procedures for aesthetics in those markets are generally paid
                 for by the patient and therefore are not commonly subject to
                 reimbursement constraints imposed by third party payors. The
                 recently developed Trilucent implant is another example of a
                 high value product for the cosmetic and reconstructive plastic
                 surgery market.  The Company's objectives include developing,
                 in-licensing, and acquiring additional products related to
                 this market.

                 Broaden Therapeutic Applications. The Company has developed
                 innovative medical products that take advantage of the
                 physical and biological properties of collagen, and has
                 developed proprietary collagen technology platforms that could
                 lead to new applications for product development. In addition,
                 The Company has implemented an "affiliate" program to expand
                 its new product development activities outside of the areas of
                 its core competence, such as vascular stents and grafts,
                 ophthalmology, and bioadhesives.

                 Enhance Biomaterials Technology. The Company has substantial
                 research, pre-clinical, clinical and regulatory expertise in
                 the development of collagen-based medical devices. The
                 Company's current objectives include improving the clinical
                 persistence of current collagen materials and reducing or
                 eliminating allergic reactions arising from the bovine source
                 of current collagen products.

         In order to facilitate the Company's overall strategy, during fiscal
1996 the Company reorganized its efforts into two operating divisions, the
Aesthetic Technologies Group and the Collagen Technologies Group.  The
Aesthetic Technologies Group capitalized on the Company's long-time medical
franchises in plastic surgery, dermatology and cosmetic medicine and focuses on
cosmetic and reconstructive medical technology products.  The Collagen
Technologies Group, on the





                                     Page 4
<PAGE>   5




other hand, is focused on the development (by the Company and its affiliates)
of products and businesses utilizing innovative collagen-based medical
technologies.  Where applicable, the following discussions will be
distinguished along divisional lines.


PRODUCTS, MARKETS AND METHODS OF DISTRIBUTION

AESTHETIC TECHNOLOGIES GROUP:

         Aesthetic Technologies offers products for soft tissue augmentation,
breast reconstruction and augmentation, and stress urinary incontinence.   In
the United States, the Company markets a line of injectable products (Zyderm(R)
I implant, Zyderm(R) II implant and Zyplast(R) implant) for soft tissue
augmentation of the face and will market a new product for deep facial
wrinkles, SoftForm(TM) facial implant ("SoftForm implant"), in the second half
of fiscal 1997. Internationally, the Company also markets its Zyderm and
Zyplast injectable products for the face; the Trilucent implant for breast
reconstruction, augmentation and replacement of previously implanted breast
implants; and expects to market a new product  for facial wrinkles, Hylaform(R)
viscoelastic gel, in the second or third quarter of fiscal 1997.  In addition,
the Company's product for stress urinary incontinence, Contigen(R) Bard
collagen implant ("Contigen implant"), is currently marketed on a worldwide
basis through its marketing partner, C.R. Bard ("Bard").

Cosmetic and Reconstructive Surgery

         Facial Implants. The Company has three principal products for the
treatment of skin contour defects: Zyderm(R) I implant,  Zyderm(R) II implant
(collectively, "Zyderm implants"), and Zyplast(R) implant ("Zyplast implant"),
a cross-linked collagen product. These products are sterile devices, composed
of highly purified bovine dermal collagen, dispersed in a saline solution
containing a small amount of lidocaine and packaged in a sterile syringe. They
are injected with a fine gauge needle into depressed layers of skin to elevate
the area to surface contour.  Depending on the indication and the product (or
product combination) used, most patients can achieve considerable correction in
one treatment session. The implants take on the texture and appearance of
normal host tissue and are subject to similar stresses and aging processes.
Consequently, supplemental treatments are often necessary after initial
treatment, depending on the location and original cause of the skin deformity.

         In June 1996, the Company entered into a distribution agreement with
Biomatrix, Inc. (of Ridgefield, New Jersey) to market a new injectable product,
Hylaform(R) viscoelastic gel ("Hylaform gel") for facial wrinkles. The Company
paid $5.0 million for these distribution rights. Hylaform gel has the potential
to bring the clinical benefits of injectable therapy to a new group of patients
- those desiring "same day" treatments (no prior test dose is necessary in the
markets where the product is currently approved), as well as those who are
sensitive to bovine collagen, and potentially giving doctors and patients a
broader range of options to treat age-related wrinkles and scars.  Biomatrix,
Inc. received CE mark approval for Hylaform gel in December 1995, allowing this
product to be marketed throughout Europe.  The Company plans to begin marketing
Hylaform gel in Western European countries in the second or third quarter in
fiscal 1997.  The Company holds exclusive marketing and distribution rights to
Hylaform gel in the United States, Canada, Australia and selected additional
markets, upon the United States Food and Drug Administration ("FDA") approval.





                                     Page 5
<PAGE>   6




         Also in June 1996, the Company entered into an in-licensing agreement
with Tissue Technologies, Inc. (of San Francisco, California) to market a new
implant, SoftForm implant, for deep facial wrinkles. The SoftForm implant is
tube-shaped and composed of expanded polytetrafluoroethylene ("ePTFE").  This
product is designed to complement Zyderm and Zyplast implants as well as the
Hylaform gel products by offering a sub-dermal (under the skin),  persistent
treatment to those patients with deep furrows.  The SoftForm implant is
expected to offer these patients a one-time surgical treatment with minimal
healing time and if desired, is reversible. The product received marketing
clearance from the FDA in April 1996 under a 510(k) application and is
anticipated to be launched in the United States in the second half of fiscal
1997 (subject to supply of product from Tissue Technologies, Inc.), with
subsequent launches internationally as regulatory approvals are obtained.

         The Company believes that opportunities exist in the market for its
facial implants based on: 1)  the growing market for aesthetic procedures among
the "baby boomer" generation;  2) consistent overseas strength and further
geographical expansion potential;  3) an expansion in the number of new
technologies for facial rejuvenation potentially offering new features and
benefits;  and 4)  the Company's increased focus on patient satisfaction.
While not anticipated, factors such as negative publicity, adverse rulings by
regulatory authorities or in connection with product liability lawsuits,
introduction of competitive products by third parties or other loss of market
acceptance for the Company's principal products may significantly and adversely
affect the Company's business, financial condition and results of operations.

         Worldwide sales and worldwide unit sales of Zyderm and Zyplast
implants increased 10% and 16%, respectively, in fiscal 1996 over fiscal 1995,
compared to a 18% and 17% increase in fiscal 1995 over fiscal 1994.  The United
States sales of Zyderm and Zyplast implants, which represented approximately
46% of worldwide sales of Zyderm and Zyplast implants in fiscal 1996, increased
3% over fiscal 1995 sales, compared to a 12% increase in fiscal 1995 over
fiscal 1994.  Revenue growth in fiscal 1995 was due to unit growth, while
revenues in fiscal 1994 were stimulated by a price increase.  Unit sales of
these implants in the United States increased 10% in fiscal 1996 over fiscal
1995, compared to a 5% increase in fiscal 1995 over 1994.  International sales
of Zyderm and Zyplast implants, which represented approximately 54% of
worldwide sales of Zyderm and Zyplast implants in fiscal 1996, increased 16%
over fiscal 1995 sales, compared to a 26% increase in fiscal 1995 over fiscal
1994.  International unit sales of these implants increased 21% in fiscal 1996
over fiscal 1995, compared to a 29% increase in fiscal 1995 over fiscal 1994.
(FOR INFORMATION REGARDING EXPORT SALES, SEE NOTE 10 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.)  The Company has expanded and intends to expand further
its direct selling efforts in certain international markets. There can be no
assurance that difficulties associated with a transition to direct marketing
efforts will not have an adverse effect on the Company's results of operations.

         The Company markets its Zyderm and Zyplast implants directly to
physicians in the United States, ten European countries, Canada, Australia and
New Zealand. The Company markets its products through distributors in all other
international markets. The Company has granted exclusive distribution rights
for Zyderm and Zyplast implants in Japan TO LEDERLE (JAPAN), LTD.   Over the
past two years, the Company has appointed a number of new foreign distributors
for its injectable collagen products.  In the United States, the Company
markets primarily to the aesthetically oriented dermatologists and plastic
surgeons through a direct sales force. Approximately 4,000 dermatologists and
plastic surgeons in the United States have purchased Zyderm and Zyplast
implants from the Company in the past year.





                                     Page 6
<PAGE>   7




         The Company utilizes a variety of methods to promote its aesthetic
products to patients and physicians.  To stimulate demand at the patient level,
the Company conducts consumer marketing awareness programs, such as public
relations events, health and beauty magazine advertising, direct mailing
campaigns and patient seminars. The Company's marketing efforts to physicians
consists of on-going training, education and promotional activities.  Examples
of physician marketing activities may include: in-office training and
education, presence at medical meetings, and direct mail campaigns. The Company
has emphasized physician education to ensure proper training in the use of its
products and timely communication of clinical and product use information.

         The Company is committed to optimizing patient satisfaction through
various marketing programs.  Market research conducted during fiscal 1996,
revealed that many patients were not receiving enough collagen material per
treatment to provide for full correction and that existing, high prices for the
product did not enable patients to purchase more. The introduction of larger
syringe fill volumes offers more material with minimal increase in cost and
injection time and an opportunity for more complete correction at only a slight
increase in treatment cost. The Company benefits from this strategy due to
increased patient satisfaction and because the marginal price charged for the
incremental material, relative to the marginal cost of the material,
economically favors the larger syringes.  In addition to larger syringes, the
United States has also introduced programs which further encourage more
complete correction at the initial treatment and on an ongoing basis.

         Breast Implants. The patented Trilucent implant was developed by
female radiologists seeking a breast implant which minimized the amount of
breast tissue obscured by breast implants during mammography and was
biocompatible in the event of a leak or rupture. Trilucent implant utilizes
soybean oil, which has a long history of parenteral use in human beings as a
filler.  To aid in radiolucency, the neutral triglycerides of the soybean oil
were selected to have the same radiodensity as human fat.  Neither saline nor
silicone-filled gel implants have this radiolucent profile.  Mammography has
been demonstrated to be important in the detection of early stage breast
cancer. In 1992, the Company participated in the formation of LipoMatrix, the
developer and manufacturer of the Trilucent implant.  During fiscal 1996, the
Company increased its ownership interest in LipoMatrix from approximately 40%
to 100% of the outstanding securities on a fully diluted basis.

         By the end of fiscal 1996, Trilucent implant was being sold in eight
European countries and clinical data had been gathered on more than 200
patients treated in Europe and over 70 patients in the United States and
Canada.   The Company recorded $2.4 million in sales from Trilucent implant
during fiscal 1996.  During fiscal 1997, the Company expects to introduce
Trilucent implant in additional European countries and begin a pivotal United
States clinical trial.  Despite lack of FDA approval in the United States,
consumer interest in the United States appears high, demonstrated by  telephone
inquiries from both physicians and interested consumers.

         Contigen Implant. According to the National Institutes of Health, more
than ten million Americans suffer from urinary incontinence, or the involuntary
loss of urine. While comprehensive data are not available as to the incidence
of a form of stress urinary incontinence called intrinsic sphincter deficiency
("ISD"), the Company has estimated, based upon physician survey information,
that as many as one million of these persons suffer from ISD, a poor or
nonfunctioning bladder outlet mechanism that may be helped by a locally
injected bulking agent. The Company and its marketing and distribution partner,
C.R. Bard, Inc. ("Bard"), received approval from the FDA to produce and market
Contigen implant in September 1993 for the treatment of ISD. ISD occurs among
all demographic groups, but its incidence increases with age and is twice as
high in women as men.





                                     Page 7
<PAGE>   8




Management and treatment alternatives have historically included absorbent
products, behavior modification, medication and surgery. Contigen implant
injections may improve stress incontinence caused by stretched pelvic muscles
from childbirth, decreased tone in the pelvic muscles supporting the bladder
(often associated with menopause and aging) and prostate surgery.

         Contigen implant is a sterile, highly purified bovine dermal collagen
that is lightly crosslinked and dispersed in a saline solution.  Contigen
implant is injected into the submucosal tissues of the urethra and/or bladder
neck, and into the tissues adjacent to the urethra. The injection of Contigen
implant creates increased tissue bulk and subsequent coaptation (joining) of
the urethral lumen. After injection, the suspended collagen forms a soft
cohesive network of fibers. Over time, the implant takes on the appearance of
normal host tissue.

         Pursuant to the terms of an agreement between the Company and Bard,
Bard purchases commercial products, including Contigen implant, developed under
this agreement. In addition, the Company receives a percentage of Bard's direct
sales to physician customers.  Bard holds exclusive worldwide marketing and
distribution rights to Contigen implant. Bard recently received reimbursement
codes for Contigen implant in the United Kingdom, France and Japan, clearing
the way for the product to be marketed in these countries.  In the United
States, Bard is working with the Association for People with Urinary Disease to
inform incontinence suffers about the benefits of Contigen implant.

         The Company recorded approximately $6.2 million, $16.5 million, and
$16.7 million of revenue from sales of Contigen implant in fiscal 1996, 1995
and 1994, respectively. Of such revenue, $.3 million, $13.4 million and $15.9
million was derived from sales of Contigen implant to Bard and $5.9 million,
$3.1 million and $789,000 from Bard's direct sales to physicians in fiscal
1996, 1995 and 1994, respectively.   (See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Product Sales").

         For the uncertainties or risk factors that exist surrounding the
marketing and distribution of the Company's cosmetic and reconstructive
products, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors Affecting Future Results of
Operations".


COLLAGEN TECHNOLOGIES GROUP:

         Orthopedics. The Company and its orthopedic marketing partner, Zimmer,
Inc. ("Zimmer"), a wholly-owned subsidiary of Bristol-Myers Squibb, received
approval from FDA in May 1993 to produce and market Collagraft(R) bone graft
matrix implant ("Collagraft implant").  Collagraft(R) bone graft matrix strip
("Collagraft strip"), a "premixed" formulation which is an early "ready-to-mix"
Collagraft implant formulation, was subsequently approved in January 1994.
Collagraft implant and Collagraft strip (collectively, "Collagraft bone graft
products"), when used with autogenous bone marrow, is indicated for use in
acute long bone fractures and traumatic osseous defects to provide a matrix for
the repair process of bone. Bone graft substitute eliminates the need for
patients to undergo a painful autograft bone grafting procedure, which involves
harvesting patients' own bone from another site, and it prevents the
transmission of human infectious agents and inconsistent results from allograft
procedures (bone graft supplied through a bone bank). During surgery,
Collagraft strip or Collagraft implant is mixed with the patient's own bone
marrow and is placed into





                                     Page 8
<PAGE>   9




the fracture site providing a scaffolding around which new bone will grow.
Medical conditions, which may require bone grafting, include acute long bone
fractures and certain tumors and cysts.

         Collagraft bone graft products are a mixture of purified fibrillar
collagen and hydroxyapatite/tricalcium phosphate ceramic ("HA/TCP") and are
supplied sterile in both a strip form (premixed) and a ready-to-mix form.
Hydroxyapatite is a substance which is biocompatible and is minimally resorbed.
Tricalcium phosphate is radiopaque, biocompatible and biodegradable. Its
degradation products can be reconstituted by the body to form new bone mineral
allowing for bone deposition.

         An agreement between the Company and Zimmer provides for the
development and distribution of collagen and other biologically-based products
for orthopedic applications. The Company will manufacture approved products and
sell them to Zimmer, which has exclusive marketing rights for Collagraft bone
graft products in the United States and Asia. The Company holds marketing
rights for Collagraft bone graft products in Europe, Canada, Africa and the
Middle East. Collagraft bone graft products are currently sold only in the
United States and the Company does not anticipate substantial sales outside the
United States for the foreseeable future.  Sales of Collagraft bone graft
products to Zimmer in fiscal 1996, 1995 and 1994 totaled $3.1 million, $3.0
million and $2.7 million, respectively.  Fiscal 1994 represented the first full
year of sales for Collagraft bone graft products.

         For the uncertainties or risk factors that exist surrounding the
marketing and distribution of Collagraft bone graft products, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations- Factors Affecting Future Results of Operations".

         Other Medical Products.  During fiscal 1995, the Company expanded its
product offerings to include a line of collagen-based materials for research
applications and other custom needs.  Sales of these products have not been
material in fiscal 1996 or fiscal 1995.



COMPETITION

         The medical device industry is characterized by rapidly evolving
technology and increasing competition under the recent changes in the health
care environment. The Company faces competition in each of its target product
markets.

         Zyderm and Zyplast implants. The Company faces direct and indirect
competition for its products.  Internationally, direct competitors in the
injectable segment have included both approved and unapproved products
primarily derived from collagen, hyaluronic acid and silicone.  In the United
States, direct competition is very small.  Collagen believes it remains in the
clear leadership position in the injectable segment in its markets.   Indirect
competitors to Zyderm and Zyplast implants include, among others, laser
treatments, chemical peels, fat injections, dermabrasion, botox injections and
face lifts. In addition, several companies are engaged in research and
development activities examining the use of collagen and other biomaterials for
the correction of soft tissue defects. There can be no assurance that the
Company will not face increased direct and indirect competition in the
soft-tissue augmentation market.





                                     Page 9
<PAGE>   10




         Trilucent implant.  The principal competitors of Trilucent implant are
saline implants worldwide, and silicone gel implants outside the United States
The Company has identified Mentor Corporation and McGhan Medical Corporation,
which market both saline implants and silicone gel implants, as being the
Company's primary competitors for breast implants.  These companies have
greater resources than the Company and have substantially more experience in
manufacturing and marketing in the breast implant market.

         Contigen implant. At the present time, autologous fat, silicon
micro-implants and polytetrafluorethane (Teflon paste, or PTFE) are directly
competing with Contigen implant for the treatment of stress incontinence due to
ISD. Neither silicon micro-implants nor PTFE have been approved by the FDA for
use in the United States. Other methods of treatment or amelioration of ISD may
be considered competitive with Contigen implant. These include surgery,
medication, absorbent products and behavior modification.

         Collagraft bone graft products.  Bone graft substitutes currently are
used in a small fraction of bone grafting procedures. The vast majority of bone
grafting procedures currently use autograft (autologous bone) taken from the
patient's own body and allograft (bone bank bone taken from deceased donors).
Collagraft bone graft products belong to a new family of products called bone
graft substitutes. The most direct competitor to Collagraft bone graft products
is Pro-Osteon, a synthetic bone graft substitute made of a coral-like mineral.
A less direct competitor to Collagraft bone graft products is an allograft bone
product called Grafton, which is packaged in a syringe and marketed and priced
like a bone graft substitute.

         In addition, several companies and institutions are engaged in the
development of collagen-based and other materials, techniques, procedures and
products for use in medical applications anticipated to be addressed by the
Company's products, including Contigen implant and Collagraft bone graft
products. Some of these companies and institutions may have substantially
greater capital resources; research and development staffs and facilities; and
experience in conducting clinical trials, obtaining regulatory approvals, and
manufacturing and marketing products similar to those of the Company. There can
be no assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective than any which have been or
may be developed by the Company or that would render the Company's technology
and products obsolete or non-competitive. There can be no assurance that such
potential competition will not have an adverse effect on the future business or
financial condition of the Company. Certain of the Company's collagen-based
products, including the Zyderm implants, were manufactured and sold pursuant to
an exclusive license from Stanford University under a United States patent,
which expired in April 1993, covering the use of native, solubilized collagen
for soft-tissue augmentation. The expiration of this patent may result in
increased competition in the market for injectable collagen implants if or when
other companies enter that market.


MANUFACTURING

         The Company manufactures its collagen-based products utilizing readily
available chemicals and enzymes. The source of its collagen is bovine (cow)
dermis. In an attempt to ensure that the hides are free from any
herd-threatening disease such as Bovine Spongiform Encephalopathy ("BSE"), the
hides are sourced from a closed herd, which requires the physical separation of
the herd from other herds, the tracking of the lineage of each animal and the
maintenance of each animal under a veterinarian program.  UNDER THE COMPANY'S
PRODUCT DEVELOPMENT AND DISTRIBUTION





                                    Page 10
<PAGE>   11




AGREEMENT WITH ZIMMER, THE COMPANY IS REQUIRED TO PURCHASE HA/TCP
(HYDROXYAPATITE/TRICALCIUM PHOSPHATE) SOLELY FROM ZIMMER FOR THE MANUFACTURE OF
COLLAGRAFT IMPLANT.  The Company believes that the supply of raw materials and
processing materials for its manufacturing operations is and will continue to
be adequate for the foreseeable future and that such materials can be available
from other sources.

         The Company's principal products have various refrigerated shelf lives
of 30 to 36 months. The Company typically ships products to physicians as
orders are received on an express delivery basis, and has no material backlog.
It is the Company's policy to maintain levels of finished goods inventory
adequate to allow for the expeditious handling of orders received. The Company
believes its physician customers typically purchase products on an as-needed
basis, while distributor customers purchase products based on inventory
stocking levels.

         The Company manufactures its collagen-based products in its Fremont,
California facility. While the Company has not experienced any disruptions in
its manufacturing schedule during the last two fiscal years and does not
anticipate any delays in the future, it is possible that the Company may
experience disruptions in its manufacturing schedule as it continues to
manufacture products in increasingly larger quantities and with new process
improvements. The Company's manufacturing facilities are subject to regulatory
requirements and periodic inspection by regulatory authorities, such as the FDA
in the United States, and in countries such as the United Kingdom, outside the
United States.  In June 1995, the Company was inspected by TUV Product Services
to ensure that the Company's products met the requirements of the European
Medical Directive.  After the completion of the inspection, the Company was
certified to place the CE Mark on its product packages and to sell its products
directly to physicians in most European countries.

         LipoMatrix produces the Trilucent implant in Neuchatel, Switzerland,
where it maintains a facility with a quality system meeting the requirements of
ISO9001 and EN46001 quality standards as certified by TUV and SQS Product
Services in December 1994.  Such certification ensures that the products
conform to the essential requirements of the European Medical Directive and
allows the CE marking to be placed on the product packages. LipoMatrix may
experience disruptions in manufacturing as it manufactures increasingly larger
quantities of products.  In addition, it may experience a significant shortage
of manufacturing capacity if its facility fails to operate as planned.


PRODUCT RESEARCH AND DEVELOPMENT

         The Company maintains an active program of technology and new product
development. The Company intends to continue to devote a significant portion of
revenues to research and product development activities throughout its product
lines to generate significant returns to stockholders. Research and Development
("R & D") expenses for the Company totaled $12.2 million, $9.9 million and $9.4
million in fiscal 1996, 1995 and 1994, respectively.  R & D expenses
represented 18%, 14% and 15% of product sales for those years.

         The Company's focus has been in four major areas:  1) new injectable
products and enhancements to existing products for the treatment of skin
contour defects, 2) Trilucent implant and enhancements, 3) investment in
affiliated companies working on a wide variety of medical indications, and  4)
joint development programs focused on the orthopedics area.





                                    Page 11
<PAGE>   12




         The soft tissue augmentation program has concentrated on improvements
relating to two performance criteria -  duration of treatment benefit and the
elimination of local inflammatory reactions.  The Company is exploring several
formulations to improve persistence of its Zyderm and Zyplast implants and is
also investigating human collagen as an alternative for the potential collagen
patients who are allergic to bovine-based products or who elect to minimize
this possibility of an allergic reaction to the product.  Two potential sources
of human collagen are being explored simultaneously: placental-sourced human
collagen and recombinant human collagen through transgenic animals and yeast.
The Company has an ongoing collaboration with IMEDEX, a subsidiary of
Rhone-Poulenc S.A., to develop new products based on the use of human
placental-collagen. In addition, the Company has made an equity investment in
and is actively collaborating with Pharming, B.V. for the purpose of developing
recombinant human collagen.

         As an enhancement to the Company's business in the area of cosmetic
and reconstructive surgery, the Company has added LipoMatrix's breast implant,
Trilucent implant, to its product line. Trilucent implants are designed and
developed at Lipomatrix' Neuchatel, Switzerland facility in accordance with
EN46001 and ISO9001 and other international standards, including risk analysis,
technical files, validation and testing.

         As part of the Company's growing orthopedics business, the Company
acquired approximately 12% of and entered into a collaborative product
development agreement, related to developing resorbable or partially resorbable
mechanical tissue-fixation devices for applications in orthopedic tissue
repairs, with Innovasive Devices, Inc. during fiscal 1996.  In addition, the
Company is investigating the use of other collagen based biomaterials for use
in a variety of orthopedic indications and continues to support its Collagraft
bone graft products, which is being marketed and sold in the United States by
Zimmer.

         With regards to investing in new ideas and products, the Company has
an active program for developing new products through affiliated companies in
which the Company makes equity and debt investments. The Company believes the
formation of new companies allows each to focus its technology on select market
segments, to bring products efficiently to market and to advance proprietary
know-how at a rapid rate. However, there can be no assurance that these
investments will result in positive returns nor can there be any assurance on
the timing of any return on such investments. The Company's affiliate
investments consist of the following principal elements:

                 New Products in New Market Segments.   In fiscal 1994, the
                 Company, together with Target, and Celtrix Pharmaceuticals,
                 Inc., formed Prograft Medical Inc. ("Prograft"). Prograft
                 focuses on the development of proprietary vascular grafts,
                 vascular stents and vascular stent-graft combinations, which
                 may use certain of the Company's biomaterials, for use in the
                 repair and replacement of diseased and damaged blood vessels.
                 As of June 30, 1996, the Company held approximately 21% of the
                 equity of, and has also entered into license and supply
                 agreements with, Prograft.  In fiscal 1994, the Company and
                 its founder, Dr.  Rodney Perkins, formed Cohesion Corporation
                 (formerly Otogen Corporation), a start-up company which is
                 currently developing surgical tissue adhesives for use in
                 general surgical applications in such areas as plastic
                 surgery, neurology, thoracic surgery and cardiology. In fiscal
                 1996, the Company increased its ownership position in Cohesion
                 Corporation from approximately 40% to 81%. Cohesion
                 Corporation anticipates that its lead product will begin
                 clinical evaluation in the third or fourth quarter of fiscal
                 1997. In fiscal 1993, the Company participated in the
                 formation of CollOptics, Inc. to develop





                                    Page 12
<PAGE>   13



                 collagen-based lenticules, which are custom-made contact
                 lenses for refractive errors.  The Company currently holds a
                 47% ownership interest in CollOptics, Inc.

                 Access to New Technology.   In fiscal 1996, the Company has
                 made an equity investment in and is actively collaborating
                 with Pharming, B.V. for the purpose of developing recombinant
                 human collagen. This technology could provide the Company with
                 a source of recombinant human collagen that is chemically
                 identical to native human collagen. The Company and Pharming,
                 B.V.  will attempt to produce collagen in the milk of dairy
                 cattle.

         For the uncertainties or risk factors that exist with the Company's
investments in affiliate companies, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Future Results of Operations".


PATENTS AND PROPRIETARY TECHNOLOGY

         The Company depends substantially upon its proprietary technological
expertise in the extraction, purification, and formulation of collagen-based
materials and other biomaterials into biomedical products.  The Company seeks
patents on inventions concerning novel manufacturing processes, composition of
matter, and applications for its proprietary biomaterials.  At present, the
Company holds over 60 issued patents and numerous patent applications.  The
Company's subsidiary, LipoMatrix, also holds several issued patents and patent
applications concerning Trilucent implant.  The Company's license from Stanford
University under a United States patent covering the use of native, solubilized
collagen for soft tissue augmentation, expired in April 1993.

         Patent-related litigation is an increasing risk in the medical device
industry.  There can be no assurance the Company will be successful in the
future in obtaining patents or license rights, that patents will be issued for
the Company's current patent applications, that the Company will develop
additional proprietary technology that is patentable, that any issued patents
will provide the Company with any competitive advantages or will not be
challenged by third parties, or that patents of others will not have an adverse
effect on the Company.  No assurance can be given that the Company's processes
or products will not infringe patents or proprietary rights of others or that
any licenses required under any such patents or proprietary rights would be
made available on terms acceptable to the Company.  If the Company does not
obtain such licenses, it could encounter delays in product introductions while
it attempts to design around such patents, or it could find that the
manufacture, sale or use of products requiring such licenses could be enjoined.
In addition, the Company could incur substantial costs in defending itself in
suits brought against the Company on such patents or in bringing suits to
protect the Company's patents against infringement.

         The Company relies upon trade secret protection for certain unpatented
aspects of other proprietary technology.  There is no assurance that others
will not independently develop or otherwise acquire substantially equivalent
proprietary information or techniques, others will not otherwise gain access to
the Company's proprietary technology or disclose such technology, or the
Company can meaningfully protect its trade secrets.

         The Company typically requires its employees and consultants to
execute appropriate confidentiality and proprietary information agreements upon
the commencement of employment or consulting relationship with the Company.
These agreements generally provide that all confidential





                                    Page 13
<PAGE>   14




77information developed or made known to the individual by the Company during
the course of the individual's relationship with the Company, is to be kept
confidential and not disclosed to third parties, except in specific
circumstances.  The agreements generally provide that all inventions conceived
by the individual in the course of rendering services to the Company shall be
the exclusive property of the Company; however, certain of the Company's
agreements with consultants, who typically are employed on a full-time basis by
academic institutions or hospitals, do not contain assignment of invention
provisions.  There can be no assurance, however, that these agreements will
provide meaningful protection or adequate remedies for the Company in the event
of unauthorized use, transfer or disclosure of such information or inventions.

         The Company holds several registered trademarks in the United States
and a number of foreign countries and vigorously pursues the protection of its
trademarks and service marks, whether registered or not.


GOVERNMENT REGULATION

         The Company's manufacturing activities and products sold in the United
States are subject to extensive and rigorous regulations by the FDA and by
comparable agencies in certain foreign countries where these products are
manufactured or distributed.  The FDA regulates the manufacture, clinical
research and sale of medical devices, including labeling, advertising and
recordkeeping.  BEFORE A NEW DEVICE CAN BE INTRODUCED IN THE MARKET, THE
MANUFACTURER MUST GENERALLY OBTAIN FDA APPROVAL OF A PRE-MARKET APPLICATION
("PMA") OR CLEARANCE OF A 510(K) NOTIFICATION.  A PMA APPLICATION MUST BE FILED
IF A PROPOSED DEVICE IS NOT SUBSTANTIALLY EQUIVALENT TO A LEGALLY MARKETED
CLASS I OR CLASS II DEVICE, OR IF IT IS A CLASS III DEVICE FOR WHICH THE FDA
HAS CALLED FOR PMAS.  THE PMA APPLICATION MUST CONTAIN THE RESULTS OF CLINICAL
TRIALS, THE RESULTS OF ALL RELEVANT BENCH TESTS, LABORATORY AND ANIMAL STUDIES,
A COMPLETE DESCRIPTION OF THE DEVICE AND ITS COMPONENTS, AND A DETAILED
DESCRIPTION OF THE METHODS, FACILITIES AND CONTROLS USED TO MANUFACTURE THE
DEVICE.  THE FDA'S REVIEW OF A PMA APPLICATION GENERALLY TAKES ONE TO TWO YEARS
FROM THE DATE THE PMA IS ACCEPTED FOR FILING, BUT IT MAY TAKE SIGNIFICANTLY
LONGER.  THE REVIEW TIME IS OFTEN SIGNIFICANTLY EXTENDED BY FDA REQUESTS FOR
ADDITIONAL INFORMATION OR CLARIFICATION OF INFORMATION ALREADY PROVIDED IN THE
SUBMISSION.  MODIFICATIONS TO A DEVICE THAT IS THE SUBJECT OF AN APPROVED PMA,
ITS LABELING OR MANUFACTURING PROCESS, MAY REQUIRE APPROVAL BY THE FDA OF PMA
SUPPLEMENTS OR NEW PMAS.  THE PMA PROCESS CAN BE EXPENSIVE, UNCERTAIN AND
LENGTHY, AND A NUMBER OF DEVICES FOR WHICH FDA APPROVAL HAS BEEN SOUGHT BY
OTHER COMPANIES HAVE NEVER BEEN APPROVED FOR MARKETING.

         IF  HUMAN CLINICAL TRIALS OF A DEVICE ARE REQUIRED, AND THE DEVICE
PRESENTS A "SIGNIFICANT RISK", THE SPONSOR OF THE TRIAL (USUALLY THE
MANUFACTURER OR THE DISTRIBUTOR OF THE DEVICE) WILL HAVE TO FILE AN
INVESTIGATIONAL DEVICE EXEMPTION ("IDE") APPLICATION PRIOR TO COMMENCING HUMAN
CLINICAL TRIALS.  THE IDE APPLICATION MUST BE SUPPORTED BY DATA, TYPICALLY
INCLUDING THE RESULTS OF ANIMAL AND LABORATORY TESTING.  IF THE IDE APPLICATION
IS APPROVED BY THE FDA AND ONE OR MORE APPROPRIATE INSTITUTIONAL REVIEW BOARDS
("IRBS"), HUMAN CLINICAL TRIALS MAY BEGIN AT A SPECIFIC NUMBER OF
INVESTIGATIONAL SITES WITH A SPECIFIC NUMBER OF PATIENTS, AS APPROVED BY THE
FDA.  IF THE DEVICE PRESENTS A "NONSIGNIFICANT RISK" TO THE PATIENT, A SPONSOR
MAY BEGIN THE CLINICAL TRIAL AFTER OBTAINING APPROVAL FOR THE STUDY BY ONE OR
MORE APPROPRIATE IRBS WITHOUT THE NEED FOR FDA APPROVAL.  SPONSORS OF CLINICAL
TRIALS ARE PERMITTED TO SELL INVESTIGATIONAL DEVICES DISTRIBUTED IN THE COURSE
OF THE STUDY PROVIDED SUCH COMPENSATION DOES NOT EXCEED RECOVERY OF THE COSTS
OF MANUFACTURE, RESEARCH, DEVELOPMENT AND HANDLING.  AN IDE SUPPLEMENT MUST BE
SUBMITTED TO, AND APPROVED BY, THE FDA BEFORE A SPONSOR OR INVESTIGATOR





                                    Page 14
<PAGE>   15




MAY MAKE A CHANGE TO THE INVESTIGATIONAL PLAN THAT MAY AFFECT ITS SCIENTIFIC
SOUNDNESS OR THE RIGHTS, SAFETY OR WELFARE OF HUMAN SUBJECTS.

         A 510(k) CLEARANCE WILL BE GRANTED IF THE SUBMITTED INFORMATION
ESTABLISHED THAT THE PROPOSED DEVICE IS "SUBSTANTIALLY EQUIVALENT" TO A LEGALLY
MARKETED CLASS I OR CLASS II MEDICAL DEVICE OR A CLASS III MEDICAL DEVICE FOR
WHICH THE FDA HAS NOT CALLED FOR PMAS.  THE FDA RECENTLY HAS BEEN REQUIRING
MORE RIGOROUS DEMONSTRATION OF SUBSTANTIAL EQUIVALENCE THAN IN THE PAST,
INCLUDING IN SOME CASES REQUIRING SUBMISSION OF CLINICAL TRIAL DATA.  THE FDA
MAY DETERMINE THAT THE PROPOSED DEVICE IS NOT SUBSTANTIALLY EQUIVALENT TO A
PREDICATE DEVICE OR THAT ADDITIONAL INFORMATION IS NEEDED BEFORE A SUBSTANTIAL
EQUIVALENCE DETERMINATION CAN BE MADE.

The Company's primary products are classified as Class III medical devices,
which require pre-market approval from the FDA.  All of the Company's products
described in "Products, Markets and Methods of Distribution," other than
Trilucent implant and Hylaform gel, have been approved for sale in the United
States.  Medical products whose market applications have not yet been approved
by the FDA may only be exported from the United States with the specific
approval of the FDA.  IN FISCAL YEAR 1997, THE COMPANY EXPECTS TO CONDUCT
TRILUCENT CLINICAL TRIALS IN EUROPE AND THE UNITED STATES, WHICH ARE EXPECTED
TO TAKE SEVERAL YEARS AND MAY INVOLVE MULTIPLE PRODUCT DESIGN CHANGES AND
CLINICAL STUDIES.  Biomatrix, Inc. submitted a PMA application in August 1995
for Hylaform gel and FDA approval of such product is currently pending. There
can be no assurance that the FDA will choose to characterize future products as
medical devices rather than drugs or biologics.  Any such change in FDA
characterization would potentially lengthen and increase the cost of the
approval process.

         The Company's clinical research program has been and remains subject
to IDE regulations of the FDA.  These regulations govern many important aspects
of the clinical investigation of medical products, including obtaining informed
consent from clinical subjects, securing the approval of an IRB and maintaining
required documentation relating to the conduct of the investigational study.
In addition, these regulations may require that the Company obtain approval
from the FDA prior to the commencement of clinical investigations of new
products or of expanded applications for commercially available products.  The
Company anticipates that during fiscal 1997 it will commence United States
clinical trials for Trilucent implant pursuant to an FDA-approved IDE.

         Compliance with current Good Manufacturing Practices ("GMP")
regulations is necessary to receive FDA approval to market new products and to
continue to market current products.  MANUFACTURERS OF MEDICAL DEVICES FOR
MARKETING IN THE UNITED STATES ARE REQUIRED TO ADHERE TO APPLICABLE REGULATIONS
SETTING FORTH DETAILED GMP REQUIREMENTS, WHICH INCLUDE TESTING, CONTROL AND
DOCUMENTATION REQUIREMENTS.  MANUFACTURERS MUST ALSO COMPLY WITH MEDICAL DEVICE
REPORTING ("MDR") REQUIREMENTS THAT A FIRM REPORT TO THE FDA ANY INCIDENT IN
WHICH ITS PRODUCT MAY HAVE CAUSED OR CONTRIBUTED TO A DEATH OR SERIOUS INJURY,
OR IN WHICH ITS PRODUCT MALFUNCTIONED AND, IF THE MALFUNCTION WERE TO RECUR, IT
WOULD BE LIKELY TO CAUSE OR CONTRIBUTE TO A DEATH OR SERIOUS INJURY.  LABELING
AND PROMOTIONAL ACTIVITIES ARE SUBJECT TO SCRUTINY BY THE FDA AND, IN CERTAIN
CIRCUMSTANCES, BY THE FEDERAL TRADE COMMISSION.  CURRENT FDA ENFORCEMENT POLICY
PROHIBITS THE MARKETING OF APPROVED MEDICAL DEVICES FOR UNAPPROVED USES.

         THE COMPANY IS REGISTERED AS A MANUFACTURER OF MEDICAL DEVICES WITH
THE FDA.  THE COMPANY IS SUBJECT TO ROUTINE INSPECTION BY THE FDA AND CERTAIN
STATE AGENCIES FOR COMPLIANCE WITH GMP REQUIREMENTS, MDR REQUIREMENTS AND OTHER
APPLICABLE REGULATIONS.   THE COMPANY'S FACILITIES AND MANUFACTURING PROCESSES
HAVE BEEN PERIODICALLY INSPECTED BY THE





                                    Page 15
<PAGE>   16




STATE OF CALIFORNIA AND OTHER AGENCIES AND REMAIN SUBJECT TO AUDIT FROM TIME TO
TIME.  THE COMPANY BELIEVES THAT IT IS IN SUBSTANTIAL COMPLIANCE WITH ALL
APPLICABLE FEDERAL AND STATE REGULATIONS.  NEVERTHELESS, THERE CAN BE NO
ASSURANCE THAT THE FDA OR A STATE AGENCY WILL AGREE WITH THE COMPANY'S
POSITION, OR THAT ITS GMP COMPLIANCE WILL NOT BE CHALLENGED AT SOME SUBSEQUENT
POINT IN TIME.  ENFORCEMENT OF THE GMP REGULATIONS HAS INCREASED SIGNIFICANTLY
IN THE LAST SEVERAL YEARS AND THE FDA HAS PUBLICLY STATED THAT COMPLIANCE WILL
BE MORE STRICTLY SCRUTINIZED.  IN THE EVENT THAT THE COMPANY IS DETERMINED TO
BE IN NONCOMPLIANCE WITH FDA REGULATIONS, TO THE EXTENT THAT THE COMPANY IS
UNABLE TO CONVINCE THE FDA OR STATE AGENCY OF THE ADEQUACY OF ITS COMPLIANCE,
THE FDA OR STATE AGENCY HAS THE POWER TO ASSERT PENALTIES OR REMEDIES,
INCLUDING INJUNCTION OR TEMPORARY SUSPENSION OF SHIPMENT UNTIL COMPLIANCE IS
ACHIEVED.  NONCOMPLIANCE MAY ALSO LEAD TO A RECALL OF PRODUCT.  SUCH PENALTIES
OR REMEDIES COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

         The continuing trend of more stringent FDA oversight in product
clearance and enforcement activities has caused medical device manufacturers to
experience longer approval cycles, more uncertainty, greater risk and higher
expenses.  Failure to obtain, or delays in obtaining, the required regulatory
approvals for new products, including Trilucent implant, could adversely affect
the Company, as could product recalls.  In addition, there can be no assurance
that the FDA will give approval to the Company to market its current products
for broader or different applications, or that it will grant approval with
respect to separate product applications which represent extensions of the
basic collagen technology, or that existing approvals will not be withdrawn.

         IN THE UNITED STATES, HEALTH CARE PROVIDERS THAT PURCHASE MEDICAL
DEVICES, SUCH AS CONTIGEN IMPLANT, GENERALLY RELY ON THIRD-PARTY PAYORS,
PRINCIPALLY FEDERAL MEDICARE, STATE MEDICAID AND PRIVATE HEALTH INSURANCE
PLANS, TO REIMBURSE ALL OR PART OF THE COST OF THE PROCEDURE IN WHICH THE
DEVICE IS USED.  SUCH REIMBURSEMENT IS TYPICALLY AT A FIXED RATE ACCORDING TO
DIAGNOSIS-RELATED GROUPS.  CHANGES IN REIMBURSEMENT POLICIES COULD HAVE AN
ECONOMIC IMPACT ON THE PURCHASE AND USE OF MEDICAL DEVICES.  ALTHOUGH THE
COMPANY'S AESTHETIC PRODUCTS ARE NOT GENERALLY SUBJECT TO REIMBURSEMENT, A
MATERIAL DECREASE IN CURRENT REIMBURSEMENT LEVELS FOR TREATMENT OF ISD COULD
HAVE A MATERIAL ADVERSE EFFECT ON SALES OF CONTIGEN IMPLANT AND ON THE
COMPANY'S BUSINESS.

         Sales of medical devices outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.  The
time required to obtain clearance required by foreign countries may be longer
or shorter than that required for FDA clearance, and requirements for licensing
may differ significantly from FDA requirements.  Some countries have
historically permitted human studies earlier in the product development cycle
than regulations in the United States permit.  Other countries, such as Japan,
have requirements similar to those of the United States.  This disparity in the
regulation of medical devices may result in more rapid product clearance in
certain countries than in others.

EMPLOYEES

         As of  September 1, 1996, the Company employed 379  employees, of
which 53 were engaged in research and development, 125 were engaged in sales
and marketing, 128 were involved in production and quality control, and 73 were
engaged in finance and administration. None of the Company's employees is
covered by a collective bargaining agreement. The Company also has a





                                    Page 16
<PAGE>   17




Board of Scientific Advisors which currently consists of five scientists, each
of whom is prominent in his field and serves as a professor at a major academic
institution. The Company has a consulting agreement with each advisor which
ranges from two to three years.


EXECUTIVE OFFICERS

         The Company has corporate officers that are not executive officers.
As of September 13, 1996, the executive officers of the Company, who are
elected by and serve at the discretion of the Board of Directors, are as
follows:


<TABLE>
<CAPTION>
                                                                                                                        OFFICER
                    NAME                     AGE                                POSITION                                 SINCE
             -------------------------------------------------------------------------------------------------------------------
             <S>                             <C>   <C>                                                                   <C>
             Howard D. Palefsky              49    Chairman and Chief Executive Officer                                  1978
             Gary S. Petersmeyer             49    President and Chief Operating Officer                                 1995
             Deborah W. Berard               37    Vice President, Human Resources and Administrative Services           1991
             Pierre Comte, Ph.D.             48    Vice President, Collagen Corporation and Chief Executive              1996
                                                   Officer, LipoMatrix subsidiary
             David Foster                    39    Vice President, Finance and MIS, and Chief Financial Officer          1990
             Michael Levitt                  45    Vice President, Operations                                            1994
             Rebecca A. Stirn                43    Vice President, Global Marketing Strategy                             1996
</TABLE>

         Mr. Palefsky joined the Company as President, Chief Executive Officer
and Director in March 1978 and served in such capacities until February 1995,
when he became the Chairman of the Board and Chief Executive Officer.  From
1973 to March 1978, Mr. Palefsky was employed by Alza Corporation where his
last position was Vice President, Marketing.  Prior to 1973, Mr. Palefsky was
employed by Whitehall Laboratories as Assistant to the President.  Both Alza
Corporation and Whitehall Laboratories are manufacturers of pharmaceutical
products.  Mr. Palefsky is also a director of Calgene, Inc., Innovasive
Devices, Inc., and Target Therapeutics, Inc.  In addition, he is a director of
Cohesion Corporation, CollOptics, Inc. and Prograft Medical, Inc., each a
privately held subsidiary of or company affiliated with the Company.

         Mr. Petersmeyer joined the Company as President, Chief Operating
Officer and Director in February 1995.  Prior to joining the Company, Mr.
Petersmeyer was employed by Syntex Corporation, a manufacturer of
pharmaceutical products, from 1991 to January 1995, where he served as Vice
President of Managed Health Care from March 1993 to January 1995, as well as
serving at various times as National Sales Director and Director of Corporate
Development.  From 1986 to 1990, he served as President and Chief Operating
Officer of Beta Phase, Inc., a medical device manufacturer, and from 1982 to
1986 he was the Executive Vice President and  General Manager, Ophthalmic
Products Division, of CooperVision, Inc., a manufacturer and distributor of
ophthalmic products. Mr. Petersmeyer is also a director of Cardiometrics, Inc.





                                    Page 17
<PAGE>   18




         Ms. Berard joined the Company as a member of the Finance staff in
February 1982 and served in various Human Resource positions.  In 1991, Ms.
Berard was promoted to Vice President, Human Resources and Administrative
services.

         Dr. Comte joined the Company as Vice President of Collagen and Chief
Executive Officer of LipoMatrix in February 1996.  Prior to joining the
Company,  Dr. Comte was Chief Operating Officer of LipoMatrix from July 1995 to
February 1996.   From January 1988 to June 1995,

      Dr. Comte was employed by Sulzer A.G. (Winterthur, Switzerland), an
international multi-Technology corporation.  Dr. Comte served as the President
of  Sulzer Medica, Orthopedics Division  from February 1991 to June 1995 and as
the Managing Director of Intermedics, S.A., a subsidiary of Sulzer A.G.,  from
January 1988 to January 1991.  Prior to his employment with Sulzer A.G.,
Dr. Comte was the General Manager of Cicorel SA, a manufacturer of printed
circuit boards, from October 1985 to December 1987.  From October 1978 to
September 1985, he was employed by the Institut Straumann A.G. "Synthes"
(Waldenburg, Switzerland), a manufacturer of  orthopedic implants, first as
Project Manager, Neurostimulation Europe from October 1978 to April 1980 and as
Head of Research and Development from May 1980 to September 1985.

         Mr. Foster joined the Company as Financial Analyst in November 1984
and served in various positions in the Company.  In 1992, Mr.  Foster was
appointed Chief Financial Officer.  From 1979 to 1984, Mr. Foster was employed
by Brown, Vence and Associates, an energy and environmental consulting firm, as
Engineering Project Manager.  In addition, Mr. Foster serves on the board of
directors of Pharming, B.V.

         Mr. Levitt joined the Company in July 1994 as Vice President,
Operations.  Prior to joining the Company, Mr. Levitt was employed by Eli Lilly
and Company, a manufacturer of pharmaceutical products.  During his 18 years
with Eli Lilly and Company, Mr. Levitt held positions in sales, research, human
resources and operations.  Mr. Levitt's last position with Eli Lilly and
Company was Director of Pharmaceutical Operations.

         Ms. Stirn joined the Company as Vice President, Global Marketing
Strategy in January 1996.   Prior to joining the Company, Ms. Stirn provided
consulting services to the Company from March 1995 to December 1995.   From
January 1988 to February 1995, Ms. Stirn consulted and served on the board of
directors for several non-profit institutions. From September 1986 to December
1987, Ms. Stirn served as Vice President of  Marketing at CEMAX, Inc.  CEMAX,
Inc. pioneered the use of three-dimensional medical imaging and computer-aided
design of custom implants.  From June 1981 to October 1985,  Ms. Stirn was
employed by CooperVision, Inc., a manufacturer and distributor of ophthalmic
products.  While employed by CooperVision, Inc., Ms. Stirn served as Vice
President of Marketing, Optics Division and in various other positions in the
Marketing department.





                                    Page 18
<PAGE>   19




                                    PART II



ITEM 7.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                 AND RESULTS OF OPERATIONS

THE COMPANY

         Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements.  Potential risks and
uncertainties include, without limitation, those mentioned in this report and,
in particular the factors described below under "Factors That May Affect Future
Results of Operations".

         Collagen Corporation (the "Company") is a technology-based company
that develops, manufactures and markets biomedical devices for the treatment of
defective, diseased, traumatized or aging human tissues.

         The Company's revenues have been derived primarily from the sale of
products  used in reconstructive and cosmetic applications for the face, the
treatment of stress urinary incontinence, and in bone repair.  The Company
markets its reconstructive and cosmetic products directly and through a network
of international distributors and its stress urinary incontinence and bone
repair products through marketing partners.


ACQUISITIONS AND INVESTMENTS

         On August 22, 1995, as part of the Company's strategy to expand its
marketing franchise in aesthetic and reconstructive technology, the Company
entered into a stock purchase agreement ("Agreement") with certain of the
stockholders of LipoMatrix, Incorporated ("LipoMatrix"), a developer and
manufacturer of the Trilucent(TM) breast implant ("Trilucent implant"), to
purchase approximately 50% of the outstanding securities of LipoMatrix on a
fully diluted basis.  The Company also entered into a stock purchase agreement
with certain of  LipoMatrix's management and employees to purchase the
remaining 10% of the outstanding securities on a fully diluted basis.  This
purchase increased the Company's ownership interest in LipoMatrix from
approximately 40% to 100% of the outstanding securities on a fully diluted
basis. The acquisition of LipoMatrix, which was accounted for as a purchase,
had an aggregate purchase price of approximately $23.7 million (See Note 6 to
the Consolidated Financial Statements). The Company completed the closing of
the aforementioned acquisition of LipoMatrix  in January 1996.

         In October 1995, the Company purchased approximately 844,000 shares of
common stock or approximately 12% in Innovasive Devices, Inc.  (of Marlborough,
Massachusetts) FOR $4.0 MILLION AND entered into a collaborative product
development agreement with Innovasive Devices, Inc.  ("Innovasive Devices").
Innovasive Devices is a company that develops, manufactures, and markets tissue
and bone reattachment systems which are particularly relevant to the sports
medicine





                                    Page 19
<PAGE>   20




and arthroscopy segments of the orthopedic surgery market.   The Company and
Innovasive Devices are collaborating to develop certain resorbable or partially
resorbable mechanical tissue-fixation devices utilizing collagen-based
biomaterials for applications in orthopedic tissue repairs.  OVER THE NEXT
SEVERAL YEARS, THE COLLABORATION WILL REQUIRE THE COMPANY'S EXPERTISE WITH
COLLAGEN-BASED BIOMATERIALS AND A SMALL PERCENTAGE OF THE COMPANY'S RESEARCH
AND DEVELOPMENT ("R&D") EXPENDITURES.

         Seeking to capitalize on recent technical successes in expressing
recombinant collagen in mouse milk, in February 1996, the Company made an
additional equity investment of approximately $4.5 million in Pharming, B.V.
(of The Netherlands), bringing the Company's ownership percentage in Pharming,
B.V. to approximately 12%.  Pharming, B.V. is dedicated to the development and
worldwide commercialization of human health care products produced in
transgenic animals.  Collagen and Pharming, B.V.  will attempt to produce
collagen in the milk of dairy cattle.

         The Company increased its ownership position in Cohesion Corporation
(of  Palo Alto, California) from approximately 40% to 81% on May 29, 1996.
Cohesion Corporation is a privately-held company that is developing novel
biomaterials with superior performance characteristics in the areas of tissue
adhesives, hemostats, biosealants, and adhesion prevention.  In connection with
the Company's investment in Cohesion Corporation, $3.0 million was allocated to
in-process research and development, which was expensed at the time of the
investment.  THE COMPANY WILL PROVIDE MINIMAL R&D SUPPORT TO COHESION
CORPORATION AS NEEDED.  Cohesion Corporation anticipates that its lead product
will begin clinical evaluation in the third or fourth quarter of fiscal 1997.

         On June 4, 1996, the Company entered into an in-licensing agreement
with Tissue Technologies, Inc. (of San Francisco, California) to market
WORLDWIDE a new implant for deep facial wrinkles.  The product had received
marketing clearance from the United States Food and Drug Administration ("FDA")
in April 1996 under a 510(K) application and is anticipated to be launched in
the United States in the second half of fiscal 1997, with subsequent launches
internationally IF AND WHEN regulatory approvals are obtained.  (FOR DISCLOSURE
WITH RESPECT TO FUTURE MINIMUM PURCHASES REQUIRED BY THE AGREEMENT WITH TISSUE
TECHNOLOGIES, INC., SEE NOTE 7 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)

         Additionally, on June 17, 1996, the Company entered into a
distribution agreement with Biomatrix, Inc. (of Ridgefield, New Jersey) to
market a new injectable product, Hylaform(R) viscoelastic gel for facial
wrinkles. The Company paid $5.0 million for the distribution RIGHTS TO MARKET
HYLAFORM(R) VISCOELASTIC GEL OUTSIDE OF THE UNITED STATES ON THE SIGNING OF THE
AGREEMENT AND HAS THE OPTION TO PURCHASE THE UNITED STATES DISTRIBUTION RIGHTS
IN THE FUTURE.  Biomatrix, Inc. received CE mark approval for Hylaform(R)
viscoelastic gel in December 1995, allowing this product to be marketed
throughout Europe.  The Company plans to begin marketing Hylaform(R)
viscoelastic gel outside the United States in the second or third quarter in
fiscal 1997.  IN ADDITION, THE COMPANY WILL PAY A TRANSFER PRICE FOR PRODUCT
SHIPMENTS, AS WELL AS ROYALTIES ON SALES OF THE IN-LICENSED PRODUCTS.

         In addition to internal R&D and joint product development
arrangements, the Company has an active program for developing new products
through affiliated companies in which the Company makes equity and debt
investments.  The Company believes the formation of new companies allows each
to focus its technology on select market segments to bring products to market
efficiently and to expand its proprietary knowledge.





                                    Page 20
<PAGE>   21




RESULTS OF OPERATIONS

         The following table shows, for the periods indicated, the percentage
relationship to product sales of certain items in the Consolidated Statements
of Income.

<TABLE>
<CAPTION>
                                                              Percent of Product Sales
                                                             ---------------------------
             Years ended June 30,                             1996       1995     1994
           -----------------------------------------------------------------------------
             <S>                                                <C>        <C>      <C>
             Product sales                                       100%      100%     100%
             Other revenue                                         3%        1%       2%
             Costs and expenses:
                  Cost of sales                                   28%       26%      29%
                  Research and development                        18%       14%      15%
                  Selling, general and administrative             57%       45%      44%
                  Acquired in-process research and                26%        --       --
                             development
           -----------------------------------------------------------------------------
             Income (loss) from operations                      (26)%       17%      13%
           -----------------------------------------------------------------------------
</TABLE>

PRODUCT SALES.   Product sales of $68.7 million in fiscal 1996 decreased $2.9
million or 4% versus fiscal 1995 sales of $71.6 million, which in turn
increased $7.0 million or 11% over fiscal 1994 sales of $64.6 million.  The
$2.9 million decrease in fiscal 1996 over 1995 was primarily due to a decrease
in shipments of  Contigen(R) Bard(R) collagen implant ("Contigen implant"),
partially offset by a $7.4 million increase in worldwide sales of plastic
surgery and dermatological products.  The $7.0 million increase in fiscal 1995
over 1994 was primarily due to growth in worldwide sales of plastic surgery and
dermatological products.

      The table below outlines the two components of product sales for Contigen
implant over the three year period.

<TABLE>
<CAPTION>
             Years ended June 30,                                                  1996      1995      1994
           --------------------------------------------------------------------------------------------------
             <S>                                                                <C>        <C>       <C>
             (In millions)
             Shipments of Contigen implant to Bard                              $    .3    $ 13.4    $ 15.9
             Income from Bard's direct sales to physician customers                 5.9       3.1        .8
                                                                              ------------------------------- 
                                                                                $   6.2    $ 16.5    $ 16.7
                                                                              -------------------------------     
</TABLE>

        The Company did not record any income from Bard's direct sales to
physician customers until fiscal 1994 as Bard's sales to customers commenced
late in the second quarter of fiscal 1994. Fiscal 1995 sales to Bard represent
minimum shipment levels made in accordance with an agreement between Bard and
the Company.  For fiscal 1996 there was no agreement for sales to Bard.  At
June 30, 1995, Bard had a significant inventory of these products and as a
result, the Company made minimal shipments to Bard in fiscal 1996 as expected.
Future income from shipments of Contigen(R) implant to Bard is expected to
resume in the third or fourth quarter of fiscal 1997.

         Worldwide sales of the Company's other aesthetic and reconstructive
products in fiscal 1996 were $58.9 million or 14% higher than fiscal 1995 sales
of $51.5 million, compared to a 18%





                                    Page 21
<PAGE>   22




increase in fiscal 1995 over fiscal 1994 sales of $43.5 million. The increase
in sales in fiscal 1996 was attributable in part to the launch of the Trilucent
implant (a triglyceride-filled mammary implant) in Europe.  The Company
believes that the increase in sales in fiscal 1995 was due to a combination of
a price increase and a growth in demand. International sales in dollars were
impacted favorably by exchange rates by $457,000 in fiscal 1996 and $1.6
million in fiscal 1995. The Company anticipates continued growth in future
worldwide product sales in dollars in these markets.

         Worldwide unit sales of the Company's other aesthetic and
reconstructive products increased approximately 16% in fiscal 1996 over fiscal
1995 and 17% in fiscal 1995 over 1994.  The Company believes the improved
performance in both fiscal 1996 and 1995 was a result of strong distributor
sales, especially in Japan, successful international marketing and public
relations efforts by the Company's subsidiaries, the launch of new syringe
configurations, and continued improving economic conditions in Europe.
Domestically, implementation of United States marketing programs designed to
both increase average treatment volume per patient and to attract and retain
new and existing patients, have favorably impacted overall unit sales.

         Collagraft(R) bone graft matrix and Collagraft(R) bone graft matrix
strip ("Collagraft bone graft products") are for the treatment of acute long
bone fractures and traumatic osseous defects.  Sales of Collagraft implant and
Collagraft strip to Zimmer, Inc. totaled $3.1 million, $3.0 million and $2.7
million in fiscal years 1996, 1995 and 1994, respectively.  Fiscal 1994
represented the first full fiscal year of sales of Collagraft bone graft
products.

         A number of uncertainties exist surrounding the marketing and
distribution of Contigen implant and Collagraft bone graft products.  The
Company's primary means of distribution for these products is through third
party firms, Bard, in the case of Contigen implant,  and Zimmer, in the case of
Collagraft bone graft products.   The Company's business and financial results
could be adversely affected in the event that either or both of these parties
are unable to market the products effectively, anticipate customer demand
accurately, or effectively manage industry- wide pricing and cost containment
pressures in health care.

OTHER REVENUE. Other revenue in fiscal years 1996, 1995 and 1994 consisted of
milestone payments of $2.0 million, $1.0 million and $1.0 million,
respectively, from Bard in accordance with an agreement between the Company and
Bard.  The final milestone payment of $2.0 million was paid to the Company on
September 30, 1995.

COST OF SALES.   Cost of sales as a percentage of product sales averaged 28%,
26% and 29% in fiscal 1996, 1995 and 1994, respectively. The increase in fiscal
1996 over 1995 in cost of sales as a percentage of product sales was primarily
due to the inclusion of start up manufacturing costs of Trilucent implant,
which continues to be launched in additional countries. Unit cost of
manufacturing for collagen-based products was considerably higher in fiscal
1996 than in fiscal 1995 due to decreased production volumes, primarily of
Contigen implant. The decrease in cost of sales as a percentage of product
sales in fiscal 1995 over 1994 was primarily due to increased product revenues
resulting from income received from Bard's direct sales of Contigen implant to
physician customers as well as the favorable impact of foreign exchange rates
on international product sales in fiscal 1995.   Additionally, cost of sales
reflected slightly lower unit costs due to increased production volumes in
fiscal 1995 and 1994, primarily from Contigen implant.





                                    Page 22
<PAGE>   23




         Due to the high fixed costs of the Company's manufacturing facility,
unit cost of manufacturing is expected to remain highly dependent on the level
of output at the Company's manufacturing facility, which is heavily dependent
on production of Contigen implant. The Company anticipates that overall unit
costs will be lower in fiscal 1997 compared to fiscal 1996 as a result of the
expected resumption of Contigen implant shipments to Bard beginning in the
third or fourth quarter of fiscal 1997 and the increased production volumes of
Trilucent implant.  In addition cost of sales as a percentage of sales is also
contingent on the product mix of future sales for which demand and pricing
characteristics may vary.

SG&A.  Selling, general and administrative ("SG&A") expenses totaled $39.0
million in fiscal 1996, $32.2 million in fiscal 1995 and $28.6 million in
fiscal 1994, representing 57%, 45%, and 44% of product sales, respectively.
SG&A expenses increased by $6.8 million, or 21% in fiscal 1996 over fiscal
1995, primarily due to the operating results of LipoMatrix and amortization
resulting from the acquisition of LipoMatrix.  Additionally, higher United
States advertising and public relation campaign expenses, costs of launching
Trilucent implant in Europe, higher international spending related to an
overall increase in sales and increased international infrastructure,
contributed to this increase.  The $3.5 million, or 12% increase in fiscal 1995
over fiscal 1994 was primarily due to higher international sales and marketing
spending, including the unfavorable impact of foreign exchange rates. The
Company expects SG&A expenses in fiscal 1997, both in absolute dollars and as a
percentage of product sales, to be at levels higher than those of fiscal 1996,
primarily due to the continued costs of launching Trilucent implant in
additional countries.

R&D.  R&D expenses, which include expenditures for regulatory compliance, were
$12.2 million  (18% of product sales) in fiscal 1996, $9.9 million (14% of
product sales) in fiscal 1995, and $9.4 million (15% of product sales) in
fiscal 1994.  The increase in R&D spending in fiscal 1996 over 1995 was
primarily attributable to R&D spending incurred by LipoMatrix, partially offset
by completion of soft tissue programs and lower expenses related to ISO 9000
certification.  The R&D spending increase in fiscal 1995 over fiscal 1994 was
primarily attributable to advancements in soft tissue programs, including
clinical trials for Zyplast(R) II Implant (a concentrated collagen material for
soft tissue augmentation), which the Company decided to discontinue at the end
of fiscal 1995. The Company expects internal R&D spending to increase
significantly in fiscal 1997.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT.  The charge for purchased
in-process research and development ("in-process R&D") of $17.8 million in
fiscal 1996  was due to the $14.8 million non-recurring charge related to the
acquisition of LipoMatrix and the $3.0 million non- recurring charge related to
the increase in ownership from approximately 40% to 81% in Cohesion
Corporation. THE VALUE ATTRIBUTED TO IN-PROCESS R&D WAS DETERMINED BY AN
INDEPENDENT APPRAISAL.  SUBSTANTIAL EFFORT, INCLUDING CLINICAL TRIALS AND
REGULATORY APPROVAL, STILL IS REQUIRED OVER THE NEXT SEVERAL YEARS BEFORE
TRILUCENT CAN BE MARKETED IN THE UNITED STATES.

OPERATING INCOME.   Operating loss was $17.6 million in fiscal 1996, compared
to operating income of $11.9 million in fiscal 1995 and operating income of
$8.6 million in fiscal 1994. The loss in the fiscal 1996 was primarily due to
the acquisition-related, non-recurring, in-process R&D charges of $17.8 million
related to LipoMatrix and Cohesion Corporation.   Excluding these acquisition
related, non-recurring R&D charges, operating income would have been
approximately $208,000 in fiscal 1996. Additionally, the decrease in operating
income in fiscal 1996 was to a large extent due to the inclusion of the
operating expenses of LipoMatrix subsequent to the acquisition in August 1995.
The 38% increase in operating income in fiscal 1995 over 1994 was attributable
primarily to





                                    Page 23
<PAGE>   24




improved sales of other aesthetic and reconstructive products, partially offset
by increased SG&A expenses.   The improvement in operating income in fiscal
1995 over 1994 was primarily the result of increased sales of Contigen implant
and Collagraft bone graft products, as well as decreased SG&A expenses.

IMPACT OF FOREIGN EXCHANGE RATES.   The impact of foreign exchange rates from
fiscal 1995 to 1996 resulted in an increase in revenue of approximately
$457,000 and an increase in operating expenses of approximately $440,000,
resulting in a net increase in operating income of approximately $17,000 on
equivalent local currency basis, compared to an increase in revenue of
approximately $1.6 million and an increase in operating expenses of
approximately $1.1 million, resulting in a net increase in operating income of
approximately $500,000 from fiscal 1994 to fiscal 1995.

    UNTIL DECEMBER 1994, THE COMPANY'S POLICY WAS TO HEDGE MATERIAL FOREIGN
CURRENCY TRANSACTION EXPOSURES.  AT JUNE 30, 1996 AND 1995, NO FOREIGN CURRENCY
TRANSACTION EXPOSURES WERE HEDGED.  UNHEDGED NET FOREIGN ASSETS WERE $14.5
MILLION AND $10.4 MILLION AT JUNE 30, 1996 AND 1995, RESPECTIVELY.

GAIN ON INVESTMENTS.   In fiscal 1996, the Company recorded a net gain on
investments of $82.1 million (pre-tax gain of approximately $86.1 million
partially offset by the recording of investment reserves of an aggregate of
$4.0 million to write-down the carrying value of certain equity investments due
to a decline in value determined to be other than temporary), resulting
primarily from the sale of 1,792,000 shares of common stock of Target
Therapeutics, Inc. ("Target").   In fiscal 1995, the Company sold 245,000
shares of common stock of Target for a pre-tax gain of approximately $6.0
million.  In addition, the Company recorded an investment reserve of $925,000
to write-down the carrying value of certain equity investments due to a decline
in value determined to be other than temporary.  In fiscal 1994, the Company
did not sell any shares of common stock of Target.

EQUITY IN EARNINGS/LOSSES OF AFFILIATE COMPANIES.  Equity in earnings of Target
was $1.4 million in fiscal 1996 compared to $2.4 million and $1.7 million in
fiscal 1995 and 1994, respectively. Equity in Target's earnings decreased in
1996 over 1995 due to the Company's ownership percentage falling from
approximately 29% at June 30, 1995 to approximately 11% at June 30, 1996.  In
December 1995, when the Company's ownership interest fell below 20%, the
Company changed from the equity to the cost method of accounting for its
investment in Target.   Equity in Target's earnings increased in fiscal 1995
over 1994 due to increased earnings of Target, partially offset by the
Company's reduced ownership interest resulting from the sale of Target shares.

         Equity in losses of other affiliate companies in fiscal 1996 was $2.3
million compared to $3.6 million in fiscal 1995 and $1.9 million in fiscal
1994.  The decrease in equity in other affiliates' losses in fiscal 1996 over
1995 was primarily due to lower LipoMatrix equity losses as a result of the
Company acquiring LipoMatrix in August 1995, partially offset by increased
losses of other affiliates.  Equity in affiliates' losses increased in fiscal
1995 over 1994 due to additional investments made in affiliate companies.  The
Company intends to continue to expand its new product development activities
through more equity investments in or loans to affiliate companies during
fiscal year 1997.  These affiliate companies typically are in an early stage of
development and may be expected to incur substantial losses which in turn will
have an adverse effect on the Company's operating results.  There can be no
assurance that these investments will result in positive returns nor





                                    Page 24
<PAGE>   25




can there be any assurance on the timing of any return on investment, or that
the Company will not lose its entire investment.

INTEREST INCOME AND EXPENSE.  Interest income was $1,145,000 in fiscal 1996,
$487,000 in fiscal 1995 and $510,000 in fiscal 1994. The increase in fiscal
1996 over 1995 was primarily due to higher average short-term investment
balances, resulting primarily from the sale of Target stock, and higher
interest rates. The decrease in fiscal 1995 over fiscal 1994 was due to lower
average investment balances, partially offset by higher interest rates.

         Interest expense of $296,00 in fiscal 1996 was related primarily to
borrowings under the $15 million revolving credit facility and the $3.3 million
credit facility (4.1 million Swiss Francs) established by LipoMatrix prior to
its acquisition by the Company.  (See Note 7 of the Consolidated Financial
Statements.)  Interest expense of $91,000 in fiscal 1995 was related primarily
to the revolving credit facility.

INCOME TAXES.  The Company's effective income tax rate was approximately 46%
for fiscal 1996 (excluding the impact of the purchased in-process research and
development charges for which no tax benefit is available) compared to 46% for
fiscal 1995 and 44% for fiscal 1994.  The 46% effective tax rate in fiscal 1996
was higher than the statutory rate due primarily to state taxes, consolidated
losses in foreign subsidiaries and increased write-downs of certain equity
investments for which no tax benefit is available currently. The increase in
fiscal 1995 compared to fiscal 1994 is due primarily to increased
non-deductible equity in losses of affiliates and investment reserves.


LIQUIDITY AND CAPITAL RESOURCES

         At June 30, 1996, the Company's cash, cash equivalents and short-term
investments were $25.4 million compared to $9.4 million at June 30, 1995.  Net
cash used in operating activities was $36.3 million for fiscal 1996, compared
with $10.3 million of net cash provided by operating activities for fiscal
1995.

         For fiscal 1996, the $36.3 million of net cash used in operating
activities was mainly attributable to $39.6 million of estimated tax payments
made during the year, of which a significant portion was related to estimated
taxes due on the sales of Target stock.  Net cash provided by investing and
financing activities of approximately $51.8 million was primarily due to a
pre-tax gain of approximately $85.8 million ($97.5 million proceeds less cost
basis of $11.7 million) from the sale of 1,792,000 shares of common stock of
Target by the Company during fiscal 1996, $5.5 million received from credit
facilities, and $1.0 million from the issuance of approximately 56,000 shares
of the Company's common stock, partially offset by the net payments of
approximately $21.7 million for the acquisition of LipoMatrix, payments of
approximately $14.3 million for additional investments in and loans to
affiliates, payments of approximately $5.5 million to repurchase 300,000 shares
of the Company's common stock at an average acquisition price of approximately
$18.00 per share, payment of $5.0 million made to Biomatrix for the
distribution rights to market Hylaform viscoelastic gel, capital expenditures
of approximately $2.6 million, net payments of $1.3 million made to increase
the Company's ownership in Cohesion Corporation from 40% to approximately 81%,
and the payments of aggregate cash dividends of approximately $1.3 million to
the Company's stockholders in July 1995 and January 1996.





                                    Page 25
<PAGE>   26




         For fiscal year 1995, the $10.3 million of cash provided by operating
activities was offset by $11.3 million used to repurchase 562,500 shares of the
Company's common stock at an average acquisition price of approximately $20 per
share, $5.7 million of additional investments in and loans to affiliate
companies and the payments of aggregate cash dividends of approximately $1.6
million to the Company's stockholders in July 1994 and January 1995.

         The Company anticipates capital expenditures, equity investments in,
and loans to affiliate companies to be approximately $12.0 million in fiscal
1997.  In June 1996, the Board of Directors authorized the Company  to
repurchase an additional 500,000 shares of the Company's common stock in the
open market and declared a dividend of ten cents per share for stockholders of
record as of June 14, 1996.

         The Company's principal sources of liquidity include cash generated
from operations, sales of Target stock, and its cash, cash equivalents and
short-term investments.  During the fiscal quarter ended September 30, 1994,
the Company's Board of Directors authorized the Company to sell portions of its
holdings  of Target's common stock.  During fiscal 1995 and 1996, the Company
sold an aggregate of 2,982,500 shares of Target common stock (adjusted for a
two-for-one stock spilt) for an aggregate pre-tax gain of approximately $91.9
million ($105.8 million proceeds less cost basis of $13.9 million). The Company
anticipates that stock sales pursuant to the authorization will be made from
time to time, under SEC Rule 144, with the objective of generating cash, for,
among other things, further investments in both current and new affiliate
companies. THE COMPANY HELD 1,605,888 SHARES OF TARGET'S COMMON STOCK AT JUNE
30, 1996.  In addition, the Company established a $7.0 million revolving credit
facility with a bank in November 1994, which was subsequently increased to
$15.0 million in December 1995.  As of June 30, 1996, $10.0 million of this
credit facility remained unused. Additionally, the Company has a $3.3 million
(4.1 million Swiss Francs) credit facility that was established by LipoMatrix
prior to the Company's acquisition of LipoMatrix , of which $1.4 million (1.8
million Swiss Francs) remained unused as of June 30, 1996.

         THE COMPANY'S CAPITAL REQUIREMENTS WILL DEPEND ON NUMEROUS FACTORS,
INCLUDING MARKET ACCEPTANCE AND DEMAND FOR THE COMPANY'S PRODUCTS; THE
RESOURCES THE COMPANY DEVOTES TO THE DEVELOPMENT, MANUFACTURE AND MARKETING OF
ITS PRODUCTS; THE PROGRESS OF THE COMPANY'S CLINICAL RESEARCH AND PRODUCT
DEVELOPMENT PROGRAMS; THE EXTENT TO WHICH THE COMPANY ENTERS INTO COLLABORATIVE
RELATIONSHIPS WITH THIRD PARTIES AND THE SCOPE OF THE COMPANY'S OBLIGATIONS IN
SUCH RELATIONSHIPS; THE RECEIPT OF, AND THE TIME REQUIRED TO OBTAIN, REGULATORY
CLEARANCES AND APPROVALS; THE RESOURCES REQUIRED TO PROTECT THE COMPANY'S
INTELLECTUAL PROPERTY AND OTHER FACTORS.  THE TIMING AND AMOUNT OF SUCH CAPITAL
REQUIREMENTS CANNOT BE ACCURATELY PREDICTED.  FUNDS MAY ALSO BE USED FOR THE
ACQUISITION OF BUSINESSES, PRODUCTS AND TECHNOLOGIES THAT ARE COMPLEMENTARY TO
THOSE OF THE COMPANY.  THE COMPANY BELIEVES THAT ITS CURRENT SOURCES OF
LIQUIDITY SHOULD BE ADEQUATE TO FUND ITS ANTICIPATED CAPITAL REQUIREMENTS
THROUGH AT LEAST DECEMBER 31, 1997.  HOWEVER, DURING THIS PERIOD OR THEREAFTER,
THE COMPANY MAY REQUIRE ADDITIONAL FINANCING.  THERE CAN BE NO ASSURANCE THAT
SUCH ADDITIONAL FINANCING WILL BE AVAILABLE ON TERMS FAVORABLE TO THE COMPANY
OR AT ALL.





                                    Page 26
<PAGE>   27




FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

         Reliance on Key Products.  Sales of the Company's collagen-based
injectable products, Zyderm I Collagen implant and Zyderm II Collagen implant
(collectively, "Zyderm implant") and Zyplast implant, as well as Trilucent
implant accounted for approximately 86% of consolidated product sales for the
fiscal year ended June 30, 1996. The Company's product sales may continue to
consist primarily of sales of these principal products. Factors such as adverse
publicity, adverse rulings by regulatory authorities, product liability
lawsuits, introduction of competitive products by third parties or other loss
of market acceptance for these principal products may significantly and
adversely affect the Company's sales of these products, and as a result, also
adversely affect the Company's business, financial condition and results of
operations.

         Dependence on Marketing Partners and Third Party Distributors; Effect
of Inventory Fluctuations. The Company has entered into certain exclusive
arrangements with Bard for the marketing and distribution of the Company's
Contigen implant product and with Zimmer for the marketing and distribution of
the Collagraft bone graft products. As a result, the Company's revenues and
earnings for these products depend substantially upon the continuing efforts of
these marketing partners. The Company's business and financial condition could
be adversely affected in the event that either or both of these parties do not
effectively market the Company's products, accurately anticipate customer
demand or effectively manage industry-wide pricing and cost-containment
pressures in health care. The Company's revenues and earnings fluctuate based
upon the levels of orders placed by these parties, which are in turn affected
by the levels of sales by these distributors and the levels of their
inventories. At June 30, 1995, Bard had a significant inventory of Contigen
implant and as a result, took minimal shipments of such product during fiscal
1996.  While future shipments to Bard are expected to resume during fiscal
1997, there can be no assurances that such actions will occur.  The failure to
resume shipments of Contigen implant to Bard during fiscal 1997 and any
significant decrease in purchases of Collagraft bone graft products by Zimmer
could have a material adverse effect on the Company's operating results.

         In addition, the Company depends upon third party distributors to
market its other products in a number of international markets.  Difficulties
in the Company's relationship with these distributors and changes in
distribution arrangements may adversely affect the Company's business,
financial condition and results of operations.

         Governmental Regulation and Adverse Publicity.  The Company's
manufacturing activities and products sold in the United States are subject to
extensive and rigorous regulation by the FDA and by comparable agencies in
certain foreign countries where these products are manufactured or distributed.
The FDA regulates the manufacture, clinical research and sale of medical
devices, including labeling, advertising and recordkeeping. The Company's
primary products are classified as Class III medical devices, which require
pre-market approval from the FDA.  While the Company's other primary products
have been approved for sale in the United States, Trilucent implant is
currently in clinical trials in the United States and, accordingly, has not
been approved for domestic commercial sale.  Medical products whose market
applications have not yet been approved by the FDA may only be exported with
the specific approval of the FDA. There can be no assurance that the FDA will
choose to characterize future products as medical devices rather than drugs or
biologics. Any such change in FDA characterization would potentially lengthen
and increase the cost of the approval process. Failure to comply with
applicable regulatory requirements can, among other things, result in fines,
suspensions of regulatory approvals, product recalls, seizure of products,





                                    Page 27
<PAGE>   28




operating restrictions, injunctions and criminal prosecution. In addition,
government regulations may be established that could prevent or delay
regulatory approval of the Company's products. Furthermore, compliance with
current Good Manufacturing Practices regulations is necessary to receive FDA
approval to market new products and to continue to market current products.

         The continuing trend of more stringent FDA oversight in product
clearance and enforcement activities has caused medical device manufacturers to
experience longer approval cycles, more uncertainty, greater risk and higher
expenses. Failure to obtain, or delays in obtaining, the required regulatory
approvals for new products, particularly with respect to Trilucent implant,
could adversely affect the Company as could product recalls. In addition, there
can be no assurance that the FDA will give approval to the Company to market
its current products for broader or different applications, or that it will
grant approval with respect to separate product applications which represent
extensions of the Company's basic technology, or that existing approvals will
not be withdrawn. Further, changes in governmental reimbursement systems,
pursuant to which hospitals and physicians are reimbursed for medical
procedures at a fixed rate according to diagnosis-related groups or other
reimbursements, could have an economic impact on the purchase and use of
medical devices. A material decrease in current reimbursement levels for
Contigen Implant and its application in the treatment of intrinsic sphincter
deficiency ("ISD") could have a material adverse effect on the Company's
business, financial condition and results of operations.

         The collagen used in the Company's products is derived from cow hides.
Bovine Spongiform Encephalopathy ("BSE") is a disease, initially reported in
cattle in the United Kingdom, characterized by degenerative lesions of the
central nervous system. The source of infections in animals derives from eating
infected sheep-derived feed. The disease has been reported in European
countries with less than one percent of cattle being affected. The Company is
not aware of any reports of BSE in United States cattle to date. Furthermore,
United States cattle are not fed sheep-derived protein and the United States
prohibits all importation of British cattle. All of the Company's injectable
collagen products are currently derived from the hides of United States cattle.
In response to the heightened awareness of BSE in Europe, the Company currently
uses "closed herds" that are controlled as to lineage, feed, and separation
from other animals. There can be no assurance that the various foreign or
domestic regulatory authorities will not raise issues regarding BSE or other
matters which may adversely affect the Company's ability to manufacture, market
or sell its products.

         In past years, the Company has been the subject of legislative and
regulatory investigations relating to, among other things, the safety and
efficacy of its injectable collagen products. There can be no assurance that
legislative and regulatory investigations or negative publicity from such
investigations or future investigations or from the news media will not result
in a material adverse effect on the Company's business, financial condition or
results of operations. In addition, significant negative publicity could result
in an increased number of product liability claims.

         Risk of Investments in Affiliates. The Company has made significant
equity and debt investments in affiliated companies that are involved in the
development of complementary or related technologies or products, and the
Company currently intends to continue to make significant additional
investments from time to time in the future. These affiliated companies
typically are in an early stage of development and may be expected to incur
substantial losses. As a result, the Company has recorded and expects to
continue to record a share of the losses in such affiliates attributable to the
Company's ownership, which losses have had and will continue to have an adverse
effect on the Company's operating results. Furthermore, there can be no
assurance that any





                                    Page 28
<PAGE>   29




investments in affiliates will result in any return nor as to the timing of
such return, or that the Company will not lose its entire investment.

         Effect of Ownership Interest in Target.  As of June 30, 1996, the
Company owned approximately 1.6 million shares of Target Common Stock,
representing approximately 11% of the outstanding shares of Target Common Stock
valued at over $65 million (based on a market price of $41 per share on such
date). The Company's earnings have been significantly favorably affected in
recent periods by revenues resulting from the sale of portions of the Company's
holdings in Target. The Company has engaged in regular open-market sales of its
Target Common Stock and expects to continue such sales. The Company's ownership
of Target may also be further reduced through additional equity offerings by
Target that dilute the Company's ownership interest.  The market price of
Target's Common Stock is highly volatile and, as a medical device manufacture,
Target is subject to a number of the same factors affecting its operations as
the Company, as well as additional factors not applicable to the Company.
Readers are encouraged to review Target's public filings for a detailed
understanding of the nature of Target's business and the risk and uncertainties
associated with it.  Any significant downward fluctuation in the market price
for Target Common Stock could adversely impact the Company's earnings (due to
lower returns per share on sales of such stock) as well as the value of the
Company's total assets as stated on its balance sheet (based on a lower
carrying value for the Target investment, which as of June 30, 1996,
represented approximately 40% of the value of the Company's total assets).

         Competition. The medical device industry is characterized by rapidly
evolving technology and increasing competition. At the present time there is a
commercial product in the United States that is directly competitive with
Zyderm and Zyplast implants, the Company's collagen- based products for
cosmetic and reconstructive surgery. This product is a gelatin-based (denatured
collagen) product for soft tissue augmentation presently being marketed in the
United States and Canada. The Company is also aware of one foreign company
which is marketing internationally a the collagen-based material for soft
tissue augmentation. In addition, several companies are engaged in research and
development activities relating to the use of collagen and other biomaterials
for the correction of soft tissue defects. The Company's injectable collagen
products also compete in the dermatology and plastic surgery markets with
substantially different alternative treatments, such as surgery and topical
applications. In addition, several companies and institutions are engaged in
the development of collagen-based and other materials, techniques, procedures
and products for use in medical applications anticipated to be addressed by the
Company's Contigen implant and Collagraft bone graft products.  Furthermore,
several companies market mammary implants that do or will compete with the
Trilucent implant.   Some of these companies and institutions may, and with
respect to certain of the companies marketing products competitively Trilucent
implant certainly do, have substantially greater capital resources; research
and development staffs and facilities; and experience in conducting clinical
trials, obtaining regulatory approvals, and manufacturing and marketing
products similar to those of the Company. These companies and institutions may
represent significant long-term competition for the Company. There can be no
assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective than any which have been or
may be developed by the Company or that would render the Company's technology
and products obsolete or non-competitive. There can be no assurance that such
potential competition will not have an adverse effect on the future business,
financial condition or results of operations of the Company.  Certain of the
Company's collagen-based products, including the Zyderm implants, were
manufactured and sold pursuant to an exclusive license from Stanford University
under a United States patent, which expired in April 1993, covering the use of
native, solubilized collagen for soft- tissue augmentation. The expiration of
this patent may result in





                                    Page 29
<PAGE>   30




increased competition in the market for injectable collagen implants if and as
other companies enter that market.

         Undeveloped and Uncertain Markets. Certain of the Company's products,
including those marketed by its marketing partners, are intended for use in new
markets the size of which are difficult to independently verify. In particular,
the potential market for the Company's Contigen product is difficult to
estimate because Contigen implant represents a relatively new method of
treatment, and the Company believes that most sufferers of stress urinary
incontinence do not seek medical treatment. Furthermore, Contigen implant is
marketed to urologists, whom the Company believes generally are not the primary
care physician for individuals seeking treatment for this disorder. Should the
markets for such products be more limited than the Company or its marketing
partners currently estimate, or should the Company, its distributors and/or its
marketing partners fail to penetrate such markets to the extent anticipated,
the Company may experience lower than anticipated revenues and a resulting
adverse effect on its business, financial condition and results of operations.

         Patents and Proprietary Technology. The Company depends substantially
upon its proprietary technological expertise in the extraction, purification,
and formulation of collagen-based materials and other biomaterials into
biomedical products. The Company seeks patents on inventions concerning novel
manufacturing processes, compositions of matter, and applications for its
proprietary biomaterials.

         Patent-related litigation is an increasing risk in the medical device
industry. There can be no assurance the Company will be successful in the
future in obtaining patents or license rights, that patents will be issued for
the Company's current patent applications, that the Company will develop
additional proprietary technology that is patentable, that any issued patents
will provide the Company with any competitive advantages or will not be
challenged by third parties, or that patents of others will not have an adverse
effect on the Company.  There can be no assurance that others will not
independently develop similar products, duplicate any of the Company's
products, or design around any patents used by the Company. No assurance can be
given that the Company's processes or products will not infringe patents or
proprietary rights of others or that any licenses required under any such
patents or proprietary rights would be made available on terms acceptable to
the Company. If the Company does not obtain such licenses, it could encounter
delays in product introductions while it attempts to design around such
patents, or it could find that the manufacture, sale or use of products
requiring such licenses could be enjoined. In addition, the Company could incur
substantial costs in defending itself in suits brought against the Company on
such patents or in bringing suits to protect the Company's patents against
infringement.

         Product Liability; Insurance. The Company is involved in various legal
actions arising in the ordinary course of business, the majority of which
involve product liability claims. While the outcome of such matters currently
is not determinable it is management's opinion that these matters will not have
a material adverse effect on the Company's future consolidated financial
position and results of operations.

         The Company faces an inherent business risk of exposure to product
liability claims alleging that the use of the Company's technology or products
has resulted in adverse effects, particularly with respect to claims regarding
Trilucent implant, which is sold in a medical field (breast reconstruction and
augmentation) in which there have been sizable product liability claims.  Such
risks will exist even with respect to those products that have received or in
the future may receive





                                    Page 30
<PAGE>   31




regulatory approval for commercial sale. There can be no assurance that the
Company will avoid significant product liability claims and attendant negative
publicity.  Furthermore, there can be no assurance that present insurance
coverage will be adequate or that adequate insurance coverage will remain
available at acceptable costs, if at all, or that a product liability claim or
recall would not adversely affect the future business or financial condition of
the Company.  A successful claim brought against the Company for which coverage
is denied or in excess of its insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of
operations.  In addition, adverse product liability actions could negatively
affect the Company's ability to obtain and maintain regulatory approval for its
products.

         In light of regulatory investigations surrounding product safety, the
Company announced in September 1991 that it would indemnify physicians against
damages and legal fees arising from lawsuits brought to a jury trial alleging a
link between the Company injections and Polymyositis and Dermatomyositis. To
date, there has not been any impact of this indemnification on the Company's
results of operations. There can be no assurance, however, that any future such
claims would not have a material adverse effect on the Company's operating
results. Because the indemnification program has never been utilized, the
Company may discontinue the program in the future.

         Impact of Currency Fluctuations; Importance of Foreign Sales.
Approximately 44% of the Company's revenues in fiscal year 1996 came from its
international operations. Because international sales of the Company's products
typically are denominated in local currencies, the Company's results of
operations have been and are expected to continue to be affected by changes in
exchange rates between certain foreign currencies and the United States dollar.
Although the effect of currency fluctuations on the Company's operating results
were positive during fiscal 1996, there can be no assurance that the Company
will not experience unfavorable currency fluctuation effects in future periods,
which could have an adverse effect on the Company's operating results.
Company's operations and financial results also may be significantly affected
by other international factors, including changes in governmental regulations
or import and export restrictions, and foreign economic and political
conditions generally.

         Limited Diversity of Facilities.  All of the Company's manufacturing
capacity for collagen products, the majority of its research and development
activities, its corporate headquarters, and other critical business functions
are located near major earthquake faults. In addition, all of the Company's
manufacturing capacity for collagen-based products and Trilucent implant are
located in two primary facilities (one for collagen-based products and one for
Trilucent implant), with the Company currently maintaining only limited amounts
of finished product inventory. While the Company has some limited protection in
the form of disaster recovery programs and basic insurance coverage, the
Company's operating results and financial condition would be materially
adversely affected in the event of a major earthquake, fire or other similar
calamity, affecting its manufacturing facilities.

         Dependence on Key Personnel. The Company is dependent upon a limited
number of key management and technical personnel, the loss of any one of which
could have a material adverse effect on the Company's business. The Company's
future success will depend in part upon its ability to attract and retain
highly qualified personnel. The Company competes for such personnel with other
companies, academic institutions, government entities and other organizations.
There can be no assurance that the Company will be successful in hiring or
retaining qualified personnel.





                                    Page 35

<PAGE>   32




         Third-Party Reimbursement. Certain of the Company's products,
including Contigen implant, the Collagraft bone graft products, and, in certain
circumstances, Trilucent implant are purchased by hospitals or physicians,
which, in the United States, then bill various third-party payors including
Medicare, Medicaid and private insurers for the healthcare services provided to
patients. Third-party payors are increasingly challenging the prices charged
for medical products and services. There can be no assurance that the
reimbursement of treatments using the Company's products will not be subject to
such challenges in the future.

         The foregoing factors are not meant to represent an exhaustive list of
the risks and uncertainties attendant to the Company's business.  Due to the
factors noted above, as well as other factors that may affect the Company's
operating results, the Company's future earnings and stock price may be subject
to significant volatility, particularly on a quarterly basis. Any shortfall in
revenue or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of the Company's
common stock in any given period. Additionally, the Company may not learn of,
or be able to confirm, such shortfalls until late in the fiscal quarter, or
following the end of the quarter, which could result in an even more immediate
and adverse effect on the trading price of the Company's common stock. Finally,
the Company participates in a highly dynamic industry, which often results in
significant volatility of the Company's common stock.





                                    Page 32
<PAGE>   33

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                           Page
                                                                                                           ----
<S>                                                                                                        <C>
         Financial Statements:
              Consolidated Balance Sheets at June 30, 1996 and 1995                                        34
              Consolidated Statements of Income for the fiscal years ended June 30, 1996, 1995 and 1994    35
                                                                                                           
              Consolidated Statements of Stockholders' Equity for the fiscal years ended June 30, 1996,
              1995 and 1994                                                                                36
              Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1996, 1995 and     
              1994                                                                                         37
              Notes to Consolidated Financial Statements                                                   38
</TABLE>

         Schedules not listed above have been omitted because they are not
         required or the information required to be set forth therein is
         included in the Consolidated Financial Statements or notes thereto.




                                    Page 33
<PAGE>   34

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
Years ended June 30,                                                          1996           1995
----------------------------------------------------------------------------------------------------
(In thousands, except share and per share amounts)
<S>                                                                       <C>              <C>      
ASSETS
    Current assets:
      Cash and cash equivalents                                           $  21,676        $   6,155
      Short-term investments                                                  3,691            3,229
      Accounts receivable, less allowance for doubtful accounts
         ($375 in 1996 and $383 in 1995)                                      9,508           13,402
      Inventories                                                             9,563            5,056
      Other current assets                                                   11,496            5,568
                                                                          ---------        ---------
               Total current assets                                          55,934           33,410

    Property and equipment, net                                              15,147           16,506
    Intangible assets, net                                                    7,231            2,727
    Purchased intangibles and goodwill, net                                   7,593               --
    Investment in Target Therapeutics, Inc.                                  65,841           17,570
    Loans to officers and employees                                           2,024              759
    Other investments and assets                                              9,237            5,934
                                                                          ---------        ---------
                                                                          $ 163,007        $  76,906
                                                                          =========        =========

LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities:
      Accounts payable                                                    $   3,824        $   2,250
      Accrued compensation                                                    2,387            2,908
      Accrued liabilities                                                     9,482            7,954
      Income taxes payable                                                    7,588            5,902
      Notes payable                                                           5,079               --
                                                                          ---------        ---------
               Total current liabilities                                     28,360           19,014
    Long-term liabilities:
      Deferred income taxes                                                  27,674            8,478
      Other long-term liabilities                                             3,444            1,494
                                                                          ---------        ---------
               Total long-term liabilities                                   31,118            9,972
    Commitments and contingencies
    Minority interest                                                           528               --
    Stockholders' equity:
      Preferred stock, $.01 par value, authorized: 5,000,000
         shares;  none issued or outstanding                                     --               --
      Common shares, $.01 par value, authorized: 28,950,000 shares,
         issued: 10,575,614 shares (10,519,632 shares in 1995),
         outstanding: 8,775,614 shares (9,019,632 shares in 1995)               106              106
      Additional paid-in capital                                             64,844           63,855
      Retained earnings                                                      42,378           17,273
      Cumulative translation adjustment                                        (656)            (604)
      Unrealized gain on available-for-sale investments (1)                  34,549               --
      Treasury stock, 1,800,000 shares in 1996 (1,500,000 shares
         in 1995)                                                           (38,220)         (32,710)
                                                                          ---------        ---------
               Total stockholders' equity                                   103,001           47,920
                                                                          ---------        ---------
                                                                          $ 163,007        $  76,906
                                                                          =========        =========
</TABLE>

      The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.



                                    Page 34
<PAGE>   35

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Years ended June 30,                                                     1996            1995            1994
----------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S>                                                                     <C>             <C>             <C>     
Revenues:
   Product sales                                                        $ 68,730        $ 71,560        $ 64,552
   Other                                                                   2,000           1,000           1,000
                                                                        --------        --------        --------
                                                                          70,730          72,560          65,552
                                                                        --------        --------        --------
Costs and expenses:
   Cost of sales                                                          19,312          18,584          18,940
   Selling, general and administrative                                    39,040          32,179          28,639
   Research and development                                               12,170           9,943           9,366
   Purchased in-process research and development                          17,800              --              --
                                                                        --------        --------        --------
                                                                          88,322          60,706          56,945
                                                                        --------        --------        --------
Income (loss) from operations                                            (17,592)         11,854           8,607
Other income (expense):
   Net gain on investments, principally Target Therapeutics, Inc.         82,093           5,110              --
   Equity in earnings of Target Therapeutics, Inc.                         1,430           2,417           1,675
   Equity in losses of other affiliates                                   (2,325)         (3,577)         (1,944)
   Interest income                                                         1,145             487             510
   Interest expense                                                         (296)            (91)             --
                                                                        --------        --------        --------
Income before income taxes and minority interest                          64,455          16,200           8,848
Provision for income taxes                                                37,985           7,440           3,928
Minority interest                                                           (182)             --              --
                                                                        --------        --------        --------
Net income                                                              $ 26,652        $  8,760        $  4,920
                                                                        ========        ========        ========
Net income per share                                                    $   2.94        $    .93        $    .50
                                                                        ========        ========        ========
Shares used in calculating per share information                           9,075           9,460           9,896
                                                                        ========        ========        ========
</TABLE>


The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.



                                    Page 35
<PAGE>   36

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                             Unrealized                 Total
                                                      Additional               Cumulative     Gain on                   Stock-
 Years ended                               Common      Paid-In    Retained     Translation   Available                 holders'
 June 30, 1996, 1995 & 1994                 Stock      Capital    Earnings     Adjustment     for Sale    Treasury      Equity
                                                                                             Investment     Stock
------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S>                                       <C>         <C>         <C>          <C>          <C>         <C>             <C>   
BALANCE AT JUNE 30, 1993                  $     101   $  56,925   $   5,905    $    (414)   $      --   $  (7,581)      54,936
Sale of common stock under options
   and employee stock purchase plan               3       2,909          --           --           --          --        2,912
Tax benefit relating to stock options            --       1,338          --           --           --          --        1,338
Foreign currency translation adjustment          --          --          --         (234)          --          --         (234)
Dividends declared ($.10 per share)              --          --        (943)          --           --          --         (943)
Treasury stock purchased                         --          --          --           --           --     (13,847)     (13,847)
Net income                                       --          --       4,920           --           --          --        4,920
                                          ---------   ---------   ---------    ---------     --------    --------      -------
BALANCE AT JUNE 30, 1994                        104      61,172       9,882         (648)          --     (21,428)      49,082

Sale of common stock under options
   and employee stock purchase plan               2       2,300          --           --           --          --        2,302
Tax benefit relating to stock options            --         383          --           --           --          --          383
Foreign currency translation adjustment          --          --          --           44           --          --           44
Dividends declared ($.15 per share)              --          --      (1,369)          --           --          --       (1,369)
Treasury stock purchased                         --          --          --           --           --     (11,282)     (11,282)
Net income                                       --          --       8,760           --           --          --        8,760
                                          ---------   ---------   ---------    ---------     --------    --------      -------
 BALANCE AT JUNE 30, 1995                       106      63,855      17,273         (604)          --     (32,710)      47,920

Sale of common stock under options
   and employee stock purchase plan              --         963          --           --           --          --          963
Tax benefit relating to stock options            --          26          --           --           --          --           26
Foreign currency translation adjustment          --          --          --          (52)          --          --          (52)
Dividends declared ($.175 per share)             --          --      (1,547)          --           --          --       (1,547)
Treasury stock purchased                         --          --          --           --           --      (5,510)      (5,510)
Unrealized gain on available-for-sale            
securities                                       --          --          --           --       34,549          --       34,549
Net income                                       --          --      26,652           --           --          --       26,652
                                          ---------   ---------   ---------    ---------    ---------   ---------    ---------
BALANCE AT JUNE 30, 1996                  $     106   $  64,844   $  42,378    $    (656)   $  34,549   $ (38,220)   $ 103,001
                                          =========   =========   =========    =========    =========   =========    =========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.



                                    Page 36
<PAGE>   37

CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
Years ended June 30,                                                   1996           1995           1994
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                                 <C>             <C>             <C>     
Cash flows from operating activities:
   Net income                                                       $ 26,652        $  8,760        $  4,920
   Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:
      Purchased in-process research and development                   17,800              --              --
      Depreciation and amortization                                    6,378           4,368           3,909
      Equity in losses of affiliates                                     895           1,160             269
      Gain on investments, net                                       (82,093)         (5,110)             --
      Deferred income taxes                                           (6,660)            238             553
      Tax benefits relating to stock options                              26             383           1,338
      Decrease (increase) in assets:
       Accounts receivable                                             4,033          (1,161)         (2,968)
       Inventories                                                    (4,150)         (1,195)            306
       Other                                                          (1,828)           (737)             16
      Increase (decrease) in liabilities:
       Accounts payable, accrued liabilities and other                   874           1,709             764
       Income taxes payable                                            1,686           1,651           1,720
       Other long-term liabilities                                       137             224            (126)
                                                                    --------        --------        --------
      Total adjustments                                              (62,902)          1,530           5,781
                                                                    --------        --------        --------
    Net cash provided by (used in) operating activities              (36,250)         10,290          10,701
                                                                    --------        --------        --------
Cash flows from investing activities:
   Net proceeds from sales of Target Therapeutics, Inc. stock         97,496           8,379              --
   Net proceeds from sale of other affiliate stock                     1,447              --              --
   Proceeds from sales & maturities of short-term investments          4,043           7,366          15,331
   Purchases of short-term investments                                (4,505)         (3,126)        (12,362)
   Expenditures for property and equipment                            (2,559)         (4,385)         (4,011)
   Increase in intangible and other assets                            (6,807)         (1,385)           (269)
   Equity investments and loans to affiliates                        (14,337)         (5,737)         (2,378)
   Acquisition of LipoMatrix, Inc., net of cash balances             (21,709)             --              --
   Accrued purchase consideration and other costs of
    acquisition of LipoMatrix                                            385              --              --
   Acquisition of Cohesion Corporation, net of cash balances          (1,256)             --              --
                                                                    --------        --------        --------
    Net cash provided by (used in) investing activities               52,198           1,112          (3,689)
                                                                    --------        --------        --------
Cash flows from financing activities:
   Repurchase of common stock                                         (5,510)        (11,282)        (13,847)
   Net proceeds from issuance of common stock                            963           2,302           2,910
   Cash dividends paid                                                (1,340)         (1,636)             --
   Proceeds from bank borrowings                                       5,460              --              --
                                                                    --------        --------        --------
    Net cash used in financing activities                               (427)        (10,616)        (10,937)
                                                                    --------        --------        --------
Net increase (decrease) in cash and cash equivalents                  15,521             786          (3,925)
Cash and cash equivalents at beginning of period                       6,155           5,369           9,294
                                                                    --------        --------        --------
Cash and cash equivalents at end of period                          $ 21,676        $  6,155        $  5,369
                                                                    ========        ========        ========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                    Page 37

<PAGE>   38




                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of Collagen
Corporation (the "Company"), a Delaware corporation, and its wholly-owned and
majority-owned subsidiaries.  All significant intercompany accounts and
transactions have been eliminated.  The Company operates in one industry
segment focusing on the development, manufacturing and sale of medical devices.
Investments in unconsolidated subsidiaries, and other investments in which the
Company has a 20% to 50% interest or otherwise has the ability to exercise
significant influence, are accounted for under the equity method.

         Investments in companies in which the Company has less than a 20%
interest are carried at cost or estimated realizable value, if less.  In fiscal
1996 and 1995, investments were written down by $4.0 million and $925,000,
respectively, to estimated net realizable value.  (See Notes 4, 5 and 6).


USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management  to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.

RECLASSIFICATION

         Certain prior year amounts in the consolidated financial statements
have been reclassified to conform with the current year presentation.


CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

         The Company considers all highly liquid investments with a maturity
from date of purchase of three months or less to be cash equivalents.
Short-term investments consist principally of bankers acceptances, commercial
paper and master notes and have maturities greater than 90 days, but not
exceeding one year.

         The Company invests its excess cash in deposits with major banks and
in money market securities of companies with strong credit ratings and from a
variety of industries.  These securities are typically short-term  in nature
and, therefore, bear minimal risk.  The Company has not experienced any losses
on its money market investments.

         The Company determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation as of each
balance sheet date.  All of the Company's debt and equity securities are
classified as available-for-sale.  The carrying value of available-for-sale
debt securities approximates fair value because of the short-term maturity of
these investments.  Both realized and unrealized gains and losses on debt
securities were immaterial at June 30, 1996





                                    Page 38

<PAGE>   39




and 1995.  Available-for-sale equity securities, which includes holdings in
Target Therapeutics, Inc., are carried at fair value with the unrealized gains
and losses, net of tax, reported as a separate component of stockholders'
equity.  The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity.  Such
amortization is included in interest income.  Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale debt
securities are included in interest income.  The cost of securities sold is
based on the specific identification method.  Interest and dividends on
securities classified as available-for-sale are included in interest income.

INVENTORIES

         Inventories are valued at the lower of cost, determined on a standard
cost basis which approximates average cost, or market.

PROPERTY AND EQUIPMENT

         Depreciation and amortization of property and equipment which is
stated at cost are provided on the straight-line method over estimated useful
lives as follows:

                     Machinery and equipment                        5 - 10 years
                     Leasehold improvements                        Term of lease

INTANGIBLE ASSETS

         Intangible assets are amortized using the straight-line method.
Patents are amortized over a seventeen-year period beginning with the effective
date or over the remainder of such period from the date acquired. Trademarks
are amortized over a twenty-year period beginning with the trademark filing
dates. Purchased product distribution rights are amortized over THE LESSOR OF
THE ESTIMATED USEFUL LIFE (GENERALLY FIVE YEARS) OR THE CONTRACT PERIOD.

PURCHASED INTANGIBLES AND GOODWILL

         The excess cost over the fair value of net assets acquired (goodwill)
is generally amortized on a straight-line basis over a period not exceeding
seven years.  The cost of identified intangibles is generally amortized on a
straight-line basis over a period of seven years.  The carrying value of
goodwill and intangible assets is reviewed on a regular basis for the existence
of facts or circumstances both internally and externally that may suggest
impairment.  TO DATE NO SUCH IMPAIRMENT HAS BEEN INDICATED.  SHOULD THERE BE
INDICATION OF AN IMPAIRMENT IN THE FUTURE, THE COMPANY WILL CONFIRM THIS BY
COMPARING THE UNDISCOUNTED EXPECTED FUTURE CASH FLOWS FROM THE IMPAIRED ASSETS
TO THE CARRYING AMOUNT OF THE ASSETS.  IF THE SUM OF THE ESTIMATED CASH FLOWS
IS LOWER, AN IMPAIRMENT LOSS, MEASURED BY COMPARING THE FAIR VALUE OF THE
ASSETS TO THEIR CARRYING AMOUNTS, IS RECORDED IF SIGNIFICANT.  THE CASH FLOW
ESTIMATES THAT WILL BE USED WILL BE BASED ON MANAGEMENT'S BEST ESTIMATES, USING
APPROPRIATE AND CUSTOMARY ASSUMPTIONS AND PROJECTIONS AT THE TIME.

         In 1995, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS #121").
Adoption of SFAS#121 in fiscal 1997 is not expected to have a material impact
on the Company's financial position or results of operations.





                                    Page 39

<PAGE>   40




LOANS TO OFFICERS AND EMPLOYEES

         Principal plus accrued interest due from current and former employees
totaled approximately $378,000 and $267,000 at June 30, 1996 and 1995,
respectively, and principal plus accrued interest due from officers totaled
approximately $1,646,000 and $492,000 at June 30, 1996 and 1995, respectively.

         Included within the amounts due from officers at June 30, 1996 is
$450,000 of promissory notes secured by shares of the Company's stock and
repayable five years from the date of issuance and an unsecured promissory note
of $1,080,000, due from the Company's Chairman and Chief Executive Officer.
The $1,080,000 note is repayable at any time and payable immediately upon the
termination of his employment with the Company.  All such notes are subject to
interest at the lower of 10% per annum or the prime rate.

REVENUE RECOGNITION

         Revenue from product sales is recognized at time of shipment, net of
allowances for estimated future returns.

CONCENTRATION OF CREDIT RISK

         The Company sells its plastic surgery and dermatological products
primarily to physicians and pharmacies in North America, Europe and the Pacific
Rim.  The Company sells Contigen(R) Bard collagen implant ("Contigen implant")
to C.R. Bard, Inc. ("Bard"), its marketing partner for Contigen implant, and
Collagraft(R) bone graft matrix implant and Collagraft(R) bone graft matrix
strip to Zimmer, Inc., the Company's marketing partner for Collagraft(R) bone
graft products.   The Company performs ongoing credit evaluations of its
customers and generally does not require collateral.  The Company maintains
reserves for potential credit losses and such losses have been within
management's expectations.

         The Company allows, on occasion, its customers to return product for
credit, and also allows customers to return defective or damaged product for
credit or replacement.  Written authorization from the Company is required to
return merchandise.  Some domestic and foreign customers are subject to
extended payment terms.  These practices have not had a material effect on the
Company's working capital.

ADVERTISING COSTS

         The Company expenses advertising costs as incurred.  Total advertising
expense was $1,036,000 and $840,000 for 1996 and 1995, respectively, and was
not material for fiscal 1994.

EARNINGS PER SHARE

         Earnings per share have been computed based upon the weighted average
number of common and dilutive common equivalent shares outstanding.  Common
equivalent shares result from stock options.

FOREIGN CURRENCY TRANSLATION

         The functional currency for each foreign subsidiary is its respective
foreign currency.  Accordingly, all assets and liabilities related to these
operations are translated at the current exchange rates at the end of each
period.  The resulting cumulative translation adjustments are recorded directly
to the accumulated foreign currency translation adjustment account included in
stockholders' equity.  Revenues and expenses are translated at average exchange
rates in effect





                                    Page 40
<PAGE>   41




during the period.  Foreign currency transaction gains and losses are included
in results of operations.

         Until December 1994, the Company's policy was to hedge material
foreign currency transaction exposures.  At June 30, 1996 and June 30, 1995, no
foreign currency transaction exposures were hedged.  Unhedged net foreign
assets were $14.5 million and $10.4 million at June 30, 1996 and June 30, 1995,
respectively.


2.    BALANCE SHEET INFORMATION

<TABLE>
<CAPTION>
             Years ended June 30,                                           1996                  1995
             --------------------------------------------------------------------------------------------
             (In thousands)
             <S>                                                         <C>                  <C>
             Inventories:
                 Raw materials                                           $     1,148           $      684
                 Work-in-process                                               3,630                1,845
                 Finished goods                                                4,785                2,527
                                                                         -----------           ----------
                                                                         $     9,563           $    5,056
                                                                         ===========           ==========
             Other current assets:
                 Deferred taxes                                          $     5,104           $    3,142
                 Other                                                         6,392                2,426
                                                                         -----------           ----------
                                                                         $    11,496           $    5,568
                                                                         ===========           ==========
             Property and equipment:
                 Machinery and equipment                                 $    32,107           $   24,095
                 Leasehold improvements                                        6,862               11,937
                                                                         -----------           ----------
                                                                              38,969               36,032
                 Less accumulated depreciation and
                 amortization                                                (23,822)             (19,526)
                                                                         -----------           ----------
                                                                         $    15,147           $   16,506
                                                                          ===========           ==========
             Intangible assets:
                 Patents, trademarks and distribution rights             $     8,802           $    3,630
                 Organization costs*                                           1,892                1,887
                                                                         -----------           ----------
                                                                              10,694                5,517
                 Less amortization                                            (3,463)              (2,790)
                                                                         -----------           ----------
                                                                         $     7,231           $    2,727
                                                                         ===========           ==========
             Accrued liabilities:
                 Dividends payable                                       $       883           $      676
                 Treasury stock payable                                          976                   --
                 Other accrued liabilities                                     7,623                7,278
                                                                         -----------           ----------
                                                                         $    9 ,482           $    7,954
                                                                         ===========           ==========
</TABLE>

* Organization costs are primarily related to the formation of Collagen
International, Inc. and are fully amortized as of June 30, 1996.





                                    Page 41
                        
<PAGE>   42




3.  CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

         The following is a summary of available-for-sale securities (other
than Target Therapeutics, Inc. stock):

               AMORTIZED COST WHICH APPROXIMATES ESTIMATED FAIR VALUE
<TABLE>
<CAPTION>
               Years ended June 30,                                                        1996                 1995
               ---------------------------------------------------------------------------------------------------------
               (In thousands)
               <S>                                                                       <C>                 <C>
               Cash Equivalents:
                   Money market funds                                                    $    3,693          $      519
                   Corporate obligations                                                      8,836               1,638
                   United States Government obligations                                       1,988               --
                                                                                         ----------          ----------
                                                                                         $   14,517          $    2,157
                                                                                         ==========          ==========
               Short-term investments:
                   Municipal obligations                                                 $   --              $      972
                   Corporate obligations                                                      3,691               2,257
                                                                                         ----------          ----------
                                                                                         $    3,691          $    3,229
                                                                                         ==========          ==========
</TABLE>
         During the years ended June 30, 1996 and 1995, the Company sold
available-for-sale investments with a fair value at the dates of sale of  $4.0
million and $7.3 million, respectively.  Both gross realized and unrealized
gains and losses on these securities were insignificant.  The Company uses
amortized cost as the basis for recording gains and losses from securities
transactions.  Contractual  maturities of the debt securities do not exceed one
year at June 30, 1996.


4.  INVESTMENT IN TARGET THERAPEUTICS, INC. ("TARGET")

         The Company's investment in Target was accounted for under the equity
method through November 1995.  During December 1995, the Company's interest in
Target fell below 20%.  Given that the Company does not have the ability to
exercise significant influence, the Company began accounting for its investment
in Target under the cost method beginning in December 1995.  In fiscal 1996,
the Company sold 1,792,000 shares of Target common stock for a pre-tax gain of
approximately $85.8 million and in  fiscal 1995, the Company sold 245,000
shares of Target common stock for a pre-tax gain of approximately $6.0 million.
The Company's ownership position in Target as of June 30, 1996 was
approximately 11%.





                                    Page 42
<PAGE>   43




Condensed financial information for Target is shown below:

                               BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
               As of June 30,                                                                                         1995
               --------------------------------------------------------------------------------------------------------------
               (In thousands)
               <S>                                                                                                 <C>
               Current assets                                                                                      $   58,002
               Property and equipment                                                                                   7,704
               Other                                                                                                    6,484
                                                                                                                   ----------
               Total assets                                                                                        $   72,190
                                                                                                                   ==========
               Current liabilities                                                                                 $   11,110
               Long-term liabilities                                                                                      107
               Stockholders' equity                                                                                    60,973
               Total liabilities and stockholders' equity                                                          $   72,190
                                                                                                                   ==========
               Collagen Corporation's share of net assets                                                          $   17,570
                                                                                                                   ==========
</TABLE>


               STATEMENT OF INCOME INFORMATION
<TABLE>
<CAPTION>
               Years ended June 30,                                                              1995                  1994
               --------------------------------------------------------------------------------------------------------------
               (In thousands)
               <S>                                                                           <C>                    <C>
               Net sales                                                                     $      50,937         $   38,275
               Costs and expenses                                                                  (42,058)           (32,260)
               Interest and other income                                                             2,081              1,894
                                                                                             -------------         -----------
               Income before income taxes                                                           10,960              7,909
               Provision for income taxes                                                           (3,097)            (2,780)
                                                                                             -------------         -----------
               Net income                                                                    $       7,863         $    5,129
                                                                                             =============         ==========
</TABLE>
         Target's common stock is quoted on The Nasdaq Stock Market.  The
closing price of Target's stock at June 30, 1996 was $41 per share.  The
Company held 1,605,888 shares of Target's common stock at June 30, 1996.

         At  June 30, 1996, the Company's shares of Target common stock are
classified as available-for-sale and have been recorded at the estimated fair
value of $65.8 million.   The $58.4 million unrealized gain ($65.8 million
estimated fair value less $7.4 million cost) on these available-for-sale
securities has been reported as a separate component of stockholders' equity,
net of tax.   As of August 2, 1996, Target's closing stock price was $33-3/4
per share, resulting in a decrease of $11.6 million in the estimated fair value
of the Company's holdings in Target Therapeutics, Inc.


5.  INVESTMENT IN INNOVASIVE DEVICES, INC.

         In October 1995, the Company purchased approximately 844,000 shares of
common stock or approximately 12% in Innovasive Devices, Inc.  (of Hopkington,
Massachusetts) and entered into a





                                    Page 43
<PAGE>   44



collaborative product development agreement with Innovasive Devices, Inc.
("Innovasive Devices").    The Company and Innovasive Devices  are
collaborating to develop certain resorbable or partially resorbable mechanical
tissue-fixation devices utilizing collagen-based biomaterials for applications
in orthopedic tissue repairs.  Innovasive Devices is a company that develops,
manufactures, and markets tissue and bone reattachment systems which are
particularly relevant to the sports medicine.

         Innovasive Devices completed a public offering of its securities in
June 1996.  At June 30, 1996, Innovasive Devices' closing price on the Nasdaq
Stock Market was $10 per share.  Due to restrictions which prevent the sale of
any of the Company's shares of Innovasive Devices until October 1997, this
investment is valued at cost  of $4,064,000 at June 30, 1996.


6.  AQUISITIONS

LipoMatrix

         LipoMatrix, Incorporated ("LipoMatrix") is the developer and
manufacturer of the Trilucent(TM) breast implant, which is the first
commercially available triglyceride-filled mammary implant in the world. In
fiscal 1996, the Company introduced the Trilucent implant in most countries of
Western Europe.

         On August 22, 1995, as part of the Company's strategy to expand in its
marketing franchise in aesthetic and reconstructive products, the Company
entered into a stock purchase agreement ("Agreement") with certain of the
stockholders of LipoMatrix to purchase approximately 50% of its outstanding
securities on a fully diluted basis.  The Company also entered into a stock
purchase agreement with certain of  LipoMatrix's management and employees to
purchase the remaining 10% of the outstanding securities of LipoMatrix on a
fully diluted basis.  This purchase increased the Company's ownership interest
in LipoMatrix from approximately 40% to 100% of the outstanding securities on a
fully diluted basis.

         The acquisition of LipoMatrix, which was accounted for as a purchase,
had an aggregate purchase price of approximately $23.7 million, consisting of
payments to LipoMatrix shareholders, the balance of the Company's investment in
LipoMatrix at the date of purchase, direct costs and the assumption of
LipoMatrix' net liabilities of $926,000.  The Company completed the closing of
the aforementioned acquisition of LipoMatrix in January 1996 at which time
aggregate cash payments of approximately $20.1 million were made by the Company
to the selling LipoMatrix stockholders, as well as certain of LipoMatrix's
current and former employees.

         The assets and liabilities assumed by the Company were recorded based
on their independently appraised fair values at the date of the acquisition.
Of  the purchase price of $23.7 million, $14.8 million was allocated to
in-process research and development, $3.8 million to intangible assets and $5.1
million to goodwill. THE COMPANY CHARGED THE $14.8 MILLION ALLOCATED TO
IN-PROCESS RESEARCH AND DEVELOPMENT TO EXPENSE AT THE DATE OF ACQUISITION IN
ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 2, "ACCOUNTING
FOR RESEARCH AND DEVELOPMENT COSTS" ("SFAS #2").  THE IN-PROCESS RESEARCH AND
DEVELOPMENT REPRESENTED RESEARCH AND DEVELOPMENT PROJECTS WHERE TECHNOLOGICAL
FEASIBILITY HAS NOT YET BEEN ESTABLISHED, MAJOR REGULATORY MARKETING APPROVALS
HAVE NOT YET BEEN OBTAINED AND WHERE THERE ARE NO ALTERNATIVE FUTURE USES OR
MARKETS.  The Company's results of operations for fiscal 1996, include
LipoMatrix' results from August 22, 1995, through June 30, 1996.





                                    Page 44

<PAGE>   45




         The unaudited pro forma results of operations of the Company for
fiscal years 1996 and 1995, respectively, assuming the acquisition of
LipoMatrix occurred on July 1, 1993, on the basis described above with all
material intercompany transactions eliminated, are as follows:
<TABLE>
<CAPTION>                                                  
             Years ended June 30,                                   1996                  1995
             -------------------------------------------------------------------------------------
             (In thousands, except income per share)       
             <S>                                                   <C>                   <C>
             Total revenues                                        $  70,745             $  72,560
             Net income                                               40,436                 3,054
             Net income per share                                       4.46                   .32
</TABLE>                                                   



The unaudited pro forma net income and per share amounts above do not include a
charge for in-process research and development of $14.8 million arising from
the acquisition of LipoMatrix.  The pro forma results reflect amortization of
acquired goodwill and other intangible assets.   The unaudited pro forma
information is not necessarily indicative of the actual results of operations
had the transaction occurred at the beginning of the periods indicated, nor
should it be used to project the Company's results of operations for any future
dates or periods.

Cohesion Corporation

         The Company increased its ownership position in Cohesion Corporation
(of  Palo Alto, California) from 40% to approximately 81% on May 29, 1996.
Cohesion Corporation is a privately-held company that is developing novel
biomaterials with superior performance characteristics in the areas of tissue
adhesives, hemostats, biosealants, and adhesion prevention.  In connection with
the Company's investment in Cohesion Corporation, $3.0 million was allocated to
in-process research and development, which was expensed at the time of the
investment and $2.5 million was allocated to tangible assets.  Cohesion
Corporation anticipates that its lead product will begin clinical evaluation in
the third or fourth quarter of fiscal 1997.

         The Company determined the amounts to be allocated to in-process
technology for Cohesion Corporation based on whether technological feasibility
had been achieved and whether there was any alternative future use for the
technology.  The Company concluded that the in-process technology had no
alternative future use after taking into consideration the potential for both
usage of the technology in different products and for resale of the technology.

         Proforma information related to the purchase acquisition of Cohesion
Corporation has not been presented as the results of operations of Cohesion are
not material to the Company's operating results.





                                    Page 45
<PAGE>   46





7.    COMMITMENTS

MINIMUM LEASE PAYMENTS

         Future minimum lease payments under noncancelable operating leases at
June 30, 1996 are as follows:

<TABLE>
<CAPTION>
             --------------------------------------------------------------------------------------------
              (In thousands)
             <S>                                                              <C>              <C> 
                                                                                    1997       $    5,057
                                                                                    1998            4,682
                                                                                    1999            4,494
                                                                                    2000            3,467
                                                                                    2001            3,407
                                                                              Thereafter           10,753
                                                                                               ----------
             Total minimum lease payments                                                      $   31,860
                                                                                               ==========

</TABLE>
         Rental expense was $5.3 million, $4.7 million and $4.6 million in
fiscal 1996, fiscal 1995 and fiscal 1994, respectively.

MINIMUM PURCHASES

         Future minimum purchases required by the distribution agreement with
Tissue Technologies, Inc. at June 30, 1996 are as follows:

<TABLE>
<CAPTION>
              (In thousands)
             --------------------------------------------------------------------------------------------
             <S>                                                              <C>              <C>
                                                                                    1997       $      500
                                                                                    1998              750
                                                                                    1999            1,250
                                                                                    2000            1,438
                                                                                    2001            1,653
                                                                              Thereafter           10,440
                                                                                               ----------
             Total minimum purchases                                                           $   16,031
                                                                                               ==========

</TABLE>

REVOLVING LINE OF CREDIT AGREEMENT

         In November 1994, the Company  entered into a $7 million revolving
line of credit with a bank, secured by shares of Target common stock held by
the Company.  The terms of this facility contain certain financial covenants
and restricts the aggregate amount of cash dividends.  In December 1995, the $7
million revolving line of credit was increased to $15 million.  During fiscal
1996, $5 million was borrowed under this agreement leaving $10 million of this
credit facility unused as of June 30, 1996, and no amounts were borrowed under
this agreement as of June 30, 1995. Interest associated with this agreement is
at the Company's option, based on either the prime rate plus 1/2% or the
Eurodollar rate plus the lesser of 1-1/4% or the Alternate LIBOR applicable





                                    Page 46
<PAGE>   47
margin.  Interest is payable QUARTERLY.  Additionally, the Company is required
to pay, on a MONTHLY basis, a commitment fee of 3/8 of 1% per annum of the
unused portion.  THE WEIGHTED AVERAGE INTEREST RATE WAS 8.1%  ON THE
OUTSTANDING SHORT-TERM BORROWINGS AT JUNE 30, 1996.  THERE WERE NO OUTSTANDING
SHORT-TERM BORROWINGS AT JUNE 30, 1995.  This credit facility expires on
November 15, 1997.

TERM LOANS AND LINE OF CREDIT

         Prior to the Company's acquisition of LipoMatrix, LipoMatrix
established three term loans and a general credit line with a major bank,
totaling $3.3 million (4.1 Swiss Francs). As of June 30, 1996, $1.4 million
(1.8 million Swiss Francs) of these credit facilities is unused.  Borrowings
under these credit facilities bear interest at 7% per annum, payable
semi-annually in June and December.  Interest subsidies totaling 5.075% are
received on the term loans annually, resulting in a net interest rate due on
the term loans of  1.925%. Semi-annual repayment of these credit facilities
began on June 30, 1996, and continues over a period not to exceed ten years.
Approximately one-half of these credit facilities is guaranteed by the Swiss
Confederation.

BONUS AGREEMENT

         In February 1996, the Company entered into a cash bonus agreement with
the Company's Chairman and Chief Executive Officer whereby cash bonuses in the
amounts of $325,000, $305,000, $285,000, $265,000 and $245,000 will be paid to
him on February 13 of each of the next five years beginning in 1997, providing
that he continue to serve the Company on the applicable payment date.

8.    LEGAL MATTERS

         The Company is involved in legal actions, including product liability
and intellectual property claims, arising in the ordinary course of business.
While the outcome of such matters is currently not determinable, it is
management's opinion that these matters will not have a material adverse effect
on the Company's consolidated financial position or results of its operations.


9.   STOCKHOLDERS' EQUITY


STOCK OPTIONS

         The Company has various stock option plans under which incentive stock
options or non-statutory stock options may be granted to officers, directors,
key employees and consultants to purchase the Company's common stock.  The
options are granted at no less than the fair market value at the dates of grant
and generally expire after ten years.  Incentive stock options become
exercisable at the rate of two percent each month beginning the first full
month after the date of grant unless accelerated by the Board of Directors.
Non-statutory stock options become exercisable on a monthly or yearly basis as
determined by the Board of Directors at the date of grant.

         At June 30, 1996, the total number of shares of  common stock reserved
for issuance under the Company's current stock option plans was 1,877,073.





                                    Page 47
<PAGE>   48




         Stock option activities under the stock option plans were as follows:

<TABLE>  
<CAPTION>
                                                                                                        NUMBER
                                                               NUMBER             OPTION PRICE        OF SHARES
                                                             OF SHARES           RANGE PER SHARE     EXERCISABLE
             ---------------------------------------------------------------------------------------------------
             <S>                                            <C>            <C>                         <C>
             Outstanding at June 30, 1994                    1,250,980      $   4.69 - $ 28.25         780,412
             Granted                                           142,350         17.88 -   25.00
             Exercised                                        (128,918)         5.13 -   22.75
             Canceled or expired                               (46,436)         5.50 -   26.50
                                                             -------------------------------------------------
             Outstanding at June 30, 1995                    1,217,976          4.69 -   28.25         851,702
             Granted                                           431,100         17.00 -   20.50
             Exercised                                         (22,154)        16.25 -   22.88
             Canceled or expired                              (145,249)         6.38 -   26.50
                                                             -------------------------------------------------
             Outstanding at June 30, 1996                    1,481,673      $   4.69 - $ 28.25         669,539
                                                             =================================================
             Available for grant at
             June 30, 1996                                     395,400
                                                             =========
</TABLE>



STOCK PURCHASE PLAN

         In 1985, the Company established an employee stock purchase plan under
which 450,000 shares of the Company's common stock were reserved for issuance
to employees.  Subsequently, the Company increased the authorization to 600,000
shares.  Under the plan, the Company's employees, subject to certain
restrictions, may purchase shares at a price per share that is the lesser of 85
percent of the fair market value as of the beginning or close of the yearly
offering period.

         For fiscal 1996, 1995 and 1994, shares issued under the plan were
34,084, 36,100, and 32,741, respectively.  The average issuance price per share
was $17.83, $19.28 and $19.00 for fiscal 1996, 1995 and 1994, respectively.  At
June 30, 1996, 67,909 shares remained available for future sales under this
plan.

STOCK REPURCHASE PROGRAM

         In February 1993, the Company's Board of Directors authorized a stock
repurchase program.  In fiscal 1996, 1995 and 1994, the Company repurchased
300,000, 562,500 and 567,500 shares at average acquisition prices of
approximately $18, $20 and $24 per share, respectively.  In June 1996, the
Board of Directors authorized the repurchase of up to an additional 500,000
shares.  The Company plans to retain repurchased shares as treasury stock, but
may use a portion of the stock in various company stock benefit plans.





                                    Page 48
<PAGE>   49




STOCKHOLDER RIGHTS PLAN

         In November 1994, the Board of Directors approved a stockholder rights
plan which would entitle stockholders to purchase stock in the Company or in an
acquirer of the Company at a discounted price in the event of certain hostile
efforts to acquire control of the Company.  The rights may only be exercised,
if at all, upon the occurrence of certain events unless earlier redeemed
pursuant to the plan.  The rights expire on November 28,  2004.


10.   INTERNATIONAL SALES AND DISTRIBUTION RIGHTS

         Export sales were $32.6 million in fiscal 1996, $26.1 million in
fiscal 1995 and $20.8 million in fiscal 1994.  THESE EXPORT SALES ARE PRIMARILY
IN EUROPE ($23.8 MILLION, $19.4 MILLION AND $17.2 MILLION IN FISCAL 1996, 1995
AND 1994, RESPECTIVELY) AND THE PACIFIC RIM ($7.1 MILLION IN FISCAL 1996).  NO
OTHER GEOGRAPHIC REGION ACCOUNTED FOR TEN PERCENT OR MORE OF TOTAL SALES IN ANY
FISCAL YEAR.  The Company markets its products internationally directly in
Canada, ten European countries, Australia and New Zealand and via distributors
in other countries.  During fiscal 1996, the Company paid commissions based
upon a percentage of net sales to its former European distributor, whose
contract expired in December 1995.


11.   MAJOR CUSTOMER AND PRODUCTS

         During fiscal 1996, 1995 and 1994,  the Company realized product sales
from its marketing partner, Bard of $6.2 million, $16.5 million and $16.7
million, respectively, which represented 9%, 23% and 26% of product sales.
Bard has exclusive worldwide marketing and distribution rights for Contigen
implant, a product introduced in fiscal 1994.  These amounts were comprised of
product sales of $.3 million, $13.4 million and $15.9 million of Contigen
implant as well as $5.9 million, $3.1 million and $0.8 million of income from
Bard's direct sales of Contigen implant to physicians in fiscal 1996, 1995 and
1994, respectively.   In fiscal years 1996, 1995 and 1994, the Company also
recorded other revenue of $2.0 million, $1 million and $1 million,
respectively, which consisted of milestone payments from Bard in accordance
with an agreement between the Company and Bard.  The final milestone payment of
$2.0 million was paid to the Company on September 30, 1995.  In fiscal 1996 and
1995, 82% and 72% of sales were derived from Zyderm/Zyplast products.

         All of the Company's manufacturing capacity for collagen products, the
majority of its research and development activities, its corporate
headquarters, and other critical business functions are located near major
earthquake faults.  In addition, all of the manufacturing capacity for
collagen-based products and Trilucent implant are located in two primary
facilities (one for collagen-based products and one for Trilucent implant) with
the Company currently maintaining only limited amounts of finished product
inventory.  While the Company has some limited protection in the form of
disaster recovery programs and basic insurance coverage, the Company's
operating results and financial condition would be materially adversely
affected in the event of a major earthquake, fire or other similar calamity,
affecting its manufacturing facilities.





                                    Page 49
<PAGE>   50




12.   INCOME  TAXES

         The Company uses the liability method of accounting for income taxes 
required by SFAS No. 109.

         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of   June 30, 1996 and June 30, 1995 are presented below:

<TABLE>
<CAPTION>
             June 30,                                                                              1996          1995
             ------------------------------------------------------------------------------------------------------------
             (In thousands)
             <S>                                                                                  <C>        <C>
             Deferred tax liabilities:
                   Property, plant & equipment                                                    $    132      $     332
                   Intangible assets                                                                   512            651
                   Investments                                                                       3,154          7,491
                   Foreign earnings and credits (net)                                                   16              4
                   Unrealized gain on Target Therapeutics, Inc. stock                               23,860             --
                                                                                                  -----------------------
                        Total deferred tax liabilities                                              27,674          8,478
                                                                                                  -----------------------
             Deferred tax assets:
                   Accounts receivable                                                                 361            948
                   Inventories                                                                         472             15
                   State income taxes                                                                2,726            731
                   Equity in losses of affiliates                                                    5,665          3,419
                   Non-deductible accruals                                                           1,876          1,893
                   Other                                                                               608            360
                   Valuation allowance                                                              (5,940)        (3,595)
                                                                                                  -----------------------
                        Total deferred tax assets                                                    5,768          3,771
                                                                                                  -----------------------
                             Net deferred tax liabilities                                         $ 21,906      $   4,707
                                                                                                  =======================
</TABLE>

         The valuation allowance increased by $2,345,000, $1,998,000 and
$717,000 in fiscal 1996, 1995 and 1994, respectively.  Significant components
of the provision for income taxes are as follows:





                                    Page 50
<PAGE>   51
<TABLE>
<CAPTION>
             Years ended June 30,                                                      1996         1995           1994
             ------------------------------------------------------------------------------------------------------------
             (In thousands)
             <S>                                                                    <C>          <C>             <C>
             Current:
                  Federal                                                           $ 36,793     $ 6,358         $  2,732
                  Foreign                                                                360         164              187
                  State                                                                7,491         979              456
                                                                                    -------------------------------------
                  Total current                                                       44,644       7,501            3,375
                                                                                    -------------------------------------
             Deferred:
                  Federal                                                             (5,971)       (368)             352
                  State                                                                 (688)        307              201
                                                                                    -------------------------------------
                  Total deferred                                                      (6,659)        (61)             553
                                                                                    -------------------------------------
                                                                                    $ 37,985     $ 7,440         $  3,928
                                                                                    =====================================
</TABLE>
For financial reporting purposes, income before income taxes includes the
following components:

<TABLE>
<CAPTION>
             Years ended June 30,                                                     1996        1995       1994
             -----------------------------------------------------------------------------------------------------
             (In thousands)
             <S>                                                                     <C>         <C>         <C>
             Domestic operations                                                    $ 85,816    $16,171     $8,636
             Foreign operations                                                      (21,361)        29        212
                                                                                    ------------------------------
                                                                                    $ 64,455    $16,200     $8,848
                                                                                    ==============================
</TABLE>

         The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before taxes.  The
sources and tax effects of the differences are as follows:

<TABLE>
<CAPTION>
             Years ended June 30,                                                     1996      1995      1994
             (In thousands)
             <S>                                                                    <C>       <C>        <C>
             Income before income taxes                                             $64,455   $16,200    $8,848
                                                                                    ===========================
             Expected tax at 35%  or 34%                                            $22,559   $ 5,670    $3,008
             State income tax, net of  federal benefit                                4,422       832       434
             In-process research and development                                      6,230
             Net operating losses of subsidiaries for
               which no current benefit is realizable                                 2,166        80       (45)
             Equity in losses of affiliates                                           2,039     1,549       660
             Tax credits recognized                                                     (98)     (153)     (315)
             Foreign Sales Corporation benefit                                          (49)     (102)     (150)
             Benefit from favorable tax settlement                                     --        (543)     --
             Other                                                                      716       107       336
                                                                                    ---------------------------
                                                                                    $37,985   $ 7,440    $3,928
                                                                                    ===========================
</TABLE>




                                    Page 51


<PAGE>   52





13.   STATEMENTS OF CASH FLOWS

         Supplemental disclosures of cash flow information:

<TABLE>
<CAPTION>                                                   
             Years ended June 30,                                  1996          1995      1994
             ------------------------------------------------------------------------------------
             (In thousands)                                 
             <S>                                                  <C>           <C>        <C>       
             Cash paid during the year for:                 
                  Interest (net of capitalized interest)          $   296       $   91     $  -
                  Income taxes (net of refunds)                    42,817        5,518      (54)
                                                            
             Non-cash financing activity:                   
                  Dividends declared                              $   883       $  676     $943
                                                                                                
</TABLE>





                                    Page 52
<PAGE>   53




PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this report:

         1.  Financial Statements and Schedules

                 Financial Statements and Financial Statement Schedule - See
                 Index to Consolidated Financial Statements at Item 8 of this
                 report

         Schedules not listed above have been omitted because they are not
         required or the information required to be set forth therein is
         included in the Consolidated Financial Statements or notes thereto.





                                    Page 53
<PAGE>   54




         2. Exhibits

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER        NOTES                                  DESCRIPTION
 ------        -----                                  -----------
<S>            <C>        <C>
  3.1           (9)       Certificate of Incorporation of Collagen Subsidiary, Inc.
  3.2           (9)       Certificate of Merger of Collagen Corporation, a California
                          corporation, into Collagen Subsidiary, Inc., a Delaware corporation

  3.3          (12)       By-Laws, as amended
 10.24          (1)       Collaborative Research and Distribution Agreement with Zimmer, Inc.
                          dated as of June 26, 1985
 10.27         (1)        Distribution Agreement between Registrant and Lederle (Japan), Ltd.
                          dated as of June 26, 1985
 10.34          (2)       Agreement for Sale and Leaseback of Manufacturing Facility between
                          Registrant and Heleasco Seven, Inc.
 10.36          (3)       Amended and Restated Development and Distribution Agreement with
                          C.R. Bard, Inc., dated as of August 4, 1989
 10.38          (4)       Agreement for Sale and Leaseback of Manufacturing Facility between
                          Registrant and Heleasco Seven, Inc. dated September 25, 1989
 10.39          (4)       Agreement for Sale and Leaseback of Manufacturing Facility between
                          Registrant and Heleasco Seven, Inc. dated December 29, 1989
 10.40          (4)       Amended and Restated Promissory Note of Dale A. Stringfellow, dated
                          September 7, 1990
 10.41          (4)       Amended and Restated Promissory Note Secured by Deed of Trust by
                          Dale A. Stringfellow, dated September 7,  1990
 10.42          (4)       1984 Incentive Stock Option Plan, as amended
 10.43          (4)       1985 Employee Stock Purchase Plan, as amended
 10.44         (12)       1990 Directors' Stock Option Plan, as amended
 10.46          (5)       Agreement between Registrant and Essex Chemie, A.G. dated November
                          19, 1990
 10.56          (6)       Lease Agreement dated June 1, 1992 by and between Registrant and
                          Harbor Investment Partners
 10.58          (6)       License and Option Agreement dated June 30, 1992 between Registrant
                          and Research Development Foundation
 10.60          (7)       Amendments dated February 16, 1993 and February 18, 1993
                          respectively, to the Product Development and Distribution Agreement
                          dated January 18, 1985 by and between Registrant and Zimmer, Inc.,
                          originally filed as Exhibit  10.24 to Registrant's Form 10-K for
                          the fiscal year ended June 30, 1985
10.61*          (7)       Letter Agreement, dated April 26, 1991 and May 21, 1993 by and
                          between Collagen Corporation and A. Neville Pelletier
</TABLE>





__________________________________

* Constitutes a management contract or compensatory contract, plan or
arrangement.


                                    Page 54
<PAGE>   55



<TABLE>
<S>            <C>        <C>
 10.62          (8)       1994 Stock Option Plan
 10.63          (9)       Renewed Lease for 2500 Faber Place, Palo Alto, California dated
                          December 1, 1992 between Registrant and Leonard Ely, Shirley Ely,
                          Carl Carlsen and Mary L. Carlsen
 10.65*         (9)       Promissory Note of Howard D. Palefsky dated August 3, 1994
 10.66          (9)       Revised Form of Agreement Regarding Proprietary Information and
                          Inventions between Registrant and all employees or consultants
 10.67         (10)       Credit Agreement, dated November 15, 1994, by and between the Bank
                          of New York and the Registrant, as amended January 24, 1995
 10.67(a)      (13)       Second Amendment, Third Amendment and Fourth Amendment dated June
                          30, 1995, September 30, 1995, an December 26, 1995, respectively,
                          to Credit Agreement dated November 15, 1994 by and between the Bank
                          of New York and the Registrant
 10.67(b)      (14)       Fifth Amendment, dated March 29, 1996, to Credit Agreement dated
                          November 15, 1994 by and between the Bank of New York and the
                          Registrant
 10.67(c)                 Sixth Amendment, dated June 28, 1996, to Credit Agreement dated
                          November 15, 1994 by and between the Bank of New York and the
                          Registrant
 10.68         (10)       Letter Agreement, dated October 7, 1994, by and between C.R. Bard.
                          Inc. and the Registrant, amending the Amended and Restated
                          Development and Distribution Agreement dated August 4, 1989 between
                          the Parties originally filed as Exhibit 10.36 to the Registrant's
                          Form 10-K for the fiscal year ended June 30, 1989
 10.70*        (12)       Letter of Acceptance of Employment by and between Gary Petersmeyer
                          and the Registrant, dated December 19, 1994
 10.71**       (12)       License, Supply and Option Agreement, dated March 24, 1995 by and
                          between LipoMatrix, Incorporated and Registrant
 10.72**       (12)       Distributor Agreement dated March 24, 1995 by and between
                          LipoMatrix, Incorporated and Registrant
 10.73**       (12)       Coordination Agreement dated March 24, 1995, by and between
                          LipoMatrix Incorporated and Registrant's wholly owned subsidiary,
                          Collagen International Incorporated
 10.74*        (12)       Promissory Note of Howard D. Palefsky dated June 5, 1995
 10.75**       (12)       Letter Agreement, dated July 10, 1995 by and between C.R. Bard,
                          Inc. and the Registrant , amending the Amended and Restated
                          Development and Distribution Agreement dated August  4, 1989
                          between the Parties originally filed as Exhibit 10.36 to the
                          Registrant's Form 10-K for the fiscal year ended June 30, 1989
</TABLE>





__________________________________

 * Constitutes a management contract or compensatory contract, plan or
   arrangement.
** Confidential treatment is requested for a portion of this document.


                                    Page 55
<PAGE>   56
<TABLE>
<S>            <C>        <C>
 10.76         (11)       Stock Purchase Agreement dated August 22, 1995 between the
                          Registrant and certain stockholders of LipoMatrix, Incorporated
 10.77         (13)       Promissory Note between Howard D. Palefsky and the Registrant dated
                          December 11, 1995
 10.78         (15)       Bonus Agreement between Howard D. Palefsky and the Registrant dated
                          February 20, 1996
 10.79         (15)       Promissory Note between Howard D. Palefsky and the Registrant dated
                          February 20, 1996
 10.80         (14)       Amended and Restated Secured Loan Agreement between Ross R.
                          Erickson and the Registrant dated December 31, 1995
 10.81*                   Letter of Acceptance of Employment by Pierre Comte and the
                          Registrant dated March 21, 1995
 10.82                    Loan Agreement between the Registrant and Cohesion Corporation
                          dated May 24, 1996
10.83**                   Worldwide Medical Product Distribution Agreement between Registrant
                          and Tissue Technologies, Inc. dated June 4, 1996
10.84**                   Distribution Agreement between Registrant and Biomatrix, Inc. dated
                          June 17, 1996
10.87**                   DISTRIBUTION AGREEMENT BETWEEN REGISTRANT AND LEDERLE (JAPAN), LTD.
                          DATED JANUARY 1, 1996
  11.1                    Statement Regarding Weighted Average Common and Common Equivalent
                          Shares Used in Computation of Per Share Income
  21.1                    List of Subsidiaries
  23.1                    Consent of Ernst & Young LLP, Independent Auditors
  24.1                    Power of Attorney (see page 42)
  27.1                    Financial Data Schedule (EDGAR version only)
</TABLE>

Notes to Exhibits:
    
    (1)    Incorporated by reference to the same exhibits filed with
           Registrant's Annual Report on Form 10-K for the fiscal
           year ended June 30, 1985.
    (2)    Incorporated by reference to the same exhibits filed with
           Registrant's Current Report on Form 8-K dated March 31,
           1989.
    (3)    Incorporated by reference to the same exhibits filed with
           Registrant's Annual Report on Form 10-K for the fiscal
           year ended June 30, 1989.
    (4)    Incorporated by reference to the same exhibits filed with
           Registrant's Annual Report on Form 10-K for the fiscal
           year ended June 30, 1990.
    (5)    Incorporated by reference to the same exhibits filed with
           Registrant's Annual Report on Form 10-K for the fiscal
           year ended June 30, 1991.
    

__________________________________

 * Constitutes a management contract or compensatory contract, plan or
   arrangement.
** Confidential treatment is requested for a portion of this document.


                                    Page 56

<PAGE>   57
    
    
    
     (6)    Incorporated by reference to the same exhibits filed with
            Registrant's Annual Report on Form 10-K for the fiscal
            year ended June 30, 1992.
     (7)    Incorporated by reference to the same exhibits filed with
            Registrant's Annual Report on Form 10-K for the fiscal
            year ended June 30, 1993.
     (8)    Incorporated by reference to Exhibit 4.1 filed with
            Registrant's Registration statement of Form S-8 (No.
            33-80038) which became effective June 9, 1994.
     (9)    Incorporated by reference to the same exhibits filed with
            Registrant's Annual Report on Form 10-K for the fiscal
            year ended June 30, 1994
     (10)   Incorporated by reference to the same exhibits filed with
            Registrant's Quarterly Report on Form 10-Q for the fiscal
            quarter ended December 31, 1994.
     (11)   Incorporated by reference to exhibit 2.1 filed with
            Registrant's Current Report on Form 8-K dated September
            6, 1995.
     (12)   Incorporated by reference to the same exhibits filed with
            Registrant's Annual Report on Form 10-K for the fiscal
            year ended June 30, 1995
     (13)   Incorporated by reference to the same exhibits filed with
            Registrant's Quarterly Report on Form 10-Q for the fiscal
            quarter ended December 31, 1995
     (14)   Incorporated by reference to exhibit 10.76 originally
            filed with Registrant's Quarterly Report on Form 10-Q for
            the fiscal quarter ended December 31, 1995
     (15)   Incorporated by reference to the same exhibits filed with
            Registrant's Quarterly Report on Form 10-Q for the fiscal
            quarter ended March 31, 1996


ITEM 14.    EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM
            8-K (CONT'D)

b)          Reports on Form 8-K.  No reports on Form 8-K were filed by
            Registrant during the fiscal quarter ended June 30, 1996.





                                    Page 57
<PAGE>   58




                              COLLAGEN CORPORATION

            FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED JUNE 30, 1996


                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>

  Exhibit                                                                                      Sequentially
  Number                                         Exhibit                                       Numbered Page
--------------------------------------------------------------------------------------------------------------
 <S>        <C>
  10.67(c)  Sixth Amendment, dated June 28, 1996, to Credit Agreement dated November 15,
            1994 by and between the Bank of New York and the Registrant
  10.81*    Letter of Acceptance of Employment by Pierre Comte and the Registrant dated
            March 21, 1995
  10.82     Loan Agreement between the Registrant and Cohesion Corporation dated May 24,
            1996
  10.83**   Worldwide Medical Product Distribution Agreement between Registrant and Tissue
            Technologies, Inc. dated June 4, 1996
  10.84**   Distribution Agreement between Registrant Biomatrix, Inc. dated June 17, 1996
  10.87**   DISTRIBUTION AGREEMENT BETWEEN REGISTRANT AND LEDERLE (JAPAN), LTD. DATED
            JANUARY 1, 1996
  11.1      Statement Regarding Weighted Average Common and Common Equivalent Shares Used
            in Computation of Per Share Income
  21.1      List of Subsidiaries
  23.1      Consent of Ernst & Young LLP, Independent Auditors
  24.1      Power of Attorney (see page 42)
  27.1      Financial Data Schedule (EDGAR version only)
</TABLE>





__________________________________

 *  Constitutes a management contract or compensatory contract, plan or
    arrangement.
**  Confidential treatment is requested for a portion of this document.


                                    Page 58